Geographic Gap Marks Mortgage Interest Deduction Benefit: TaxesMarc Heller
A gap of almost $250 exists between the states reaping the highest per person benefit from the mortgage interest deduction and those with the lowest such figure, according to a Congressional Research Service report highlighting the tax break’s uneven distribution.
The geographic differences in the money saved on income taxes through the deduction should be a factor in how lawmakers approach the issue in a comprehensive review of the U.S. tax code, the CRS said.
U.S. lawmakers have been weighing how the deduction might be pared back to make it more even and to generate revenue that could be used to lower tax rates.
The CRS study, released late last month, showed the 10 smallest beneficiary states had a per capita savings of $106 through the deduction, while the figure for the biggest beneficiary states was $350, Bloomberg BNA reported.
The biggest beneficiaries included California, Colorado, Connecticut, Hawaii, Massachusetts, New Jersey and the District of Columbia, where the per capita deduction exceeded $305 per capita in 2012. In the lower-beneficiary states, which included Iowa, Arkansas, Kentucky and West Virginia, the tax savings was less than $165 per capita.
In some cases, the gap was especially pronounced, the CRS report showed. In Mississippi, for instance, the per capita totaled $87 while the figure for Maryland -- $414 -- was more than four time greater.
The CRS attributed the spread to several factors, including differences in average home prices and overall incomes, as well as the tendency of taxpayers in some areas to itemize returns due in part to higher state and local taxes. More expensive homes generally carry bigger mortgage loans, and in turn greater interest to be paid, the report said.
The deduction represents one of the biggest expenditures allowed by the tax code; it will cost the government $379 billion from 2013 to 2017, the congressional Joint Committee on Taxation said.
As the Senate Finance Committee and the House Ways and Means Committee have spent much of the past year laying the groundwork for code revisions, lobbyists for real estate agents and home builders have been making the case for the deduction. The advocates argue it is crucial to help grow and sustain the housing market, especially in the wake of the recession that battered that sector of the economy.
Tax policy analysts and interest groups, though, have urged Congress to change the mortgage interest deduction so it benefits a wider swath of taxpayers across income levels.
The National Low Income Housing Coalition wants to see it turned into a tax credit, which would make it available to people who don’t itemize deductions, said Sheila Crowley, the group’s president and chief executive officer.
The coalition’s proposal, reflected in legislation introduced last year by Democratic Representative Keith Ellison of Minnesota, would cap at $500,000 the mortgage amount on which an interest deduction could be claimed, down from $1 million.
The Congressional Budget Office estimated in 2009 that gradually capping the deduction at $500,000 would generate $41.4 billion from 2013 to 2019, according to the CRS report.
The CRS report posed other options for altering the deduction, including limiting the amount of interest that can be claimed, based on a percentage of a taxpayer’s adjusted gross income.
Crowley said she sees signs lawmakers may be rethinking their support for leaving the deduction alone. She points to a resolution first introduced by Representative Gary Miller, a California Republican, in January 2011 that opposed new restrictions on it. The measure gained 199 co-sponsors; an identical resolution Miller re-introduced in January 2013 has attracted 20 co-sponsors.
“What that says to me is lots of members of Congress are taking a second look at this,” Crowley said.
Still, the deduction’s defenders include Senator Ron Wyden, an Oregon Democrat who last week became chairman of the chamber’s Finance Committee. Wyden retained the deduction in tax-code revision legislation he proposed in 2011 with Senator Dan Coats, an Indiana Republican.
He has characterized the tax break as among “the handful of deductions and credits that have proven to help American families.”
Wyden, in an interview that aired this past weekend on Bloomberg Television’s “Political Capital with Al Hunt,” said he doesn’t anticipate major tax changes can gain the political momentum to pass this year. He said that as a result, his priority will be extending about 50 tax breaks that expired as 2013 ended. These include a decades-old credit for research and product development by businesses.
“My hope is that we can get them re-enacted promptly,” Wyden said. “Then use them as a bridge to more comprehensive reform.”
Representative Dave Camp, a Michigan Republican who as chairman of the House Ways and Means Committee has led the push for comprehensive tax-code changes, has declined to comment on how his effort will treat particular deductions.
Lobbyists have said they think Camp must consider changes to the biggest, most politically popular tax expenditures in order to keep his pledge to reduce top rates to 25 percent from 39.6 percent for individuals.
Ellison’s bill is H.R. 11213.