Countering Claims Against Mortgage Interest

 

It appears TPC analysts are assuming in their analysis that home owners will sell off financial assets to pay down mortgages that, under MID repeal, now have a higher after-tax interest rate.
Courtesy of New Jersey Estate Planning & Elder Law Blog

Sometimes it is useful to take a step back and look at the claims made against a policy like the mortgage interest deduction (MID). A good example is this column authored by an analyst from the usually informative Tax Policy Center (TPC), which claims that repealing the MID would result in minor tax increases on homeowners.

In fact, the impacts, tax and economic, would be significant, particularly at this moment in time, as the economy and the housing markets struggle to recover from the Great Recession.

The author claims that the average tax bill for taxpayers would increase by $700 if MID were eliminated. This estimate is at odds with the official distributional analysis from the tax expenditure budget (JCS-3-10) of the Congressional Joint Committee on Taxation.

Estimating from the numbers in that document, the average tax benefit for the tens of millions of MID beneficiaries is almost $2,200 per year. For home owners with incomes between $50,000 and $200,000 – the income class of most home buyers and MID benefiting taxpayers – the average benefit is approximately $2,350 per year. That’s money that can be used for landscape improvements.

Home owners now have lower income (and taxes paid) because they have shuffled their financial portfolio. This lower income, and tax on that income, offsets the direct tax increase due to the loss of the deduction for mortgage interest.

This effect is not mentioned in the text of the column, although TPC acknowledges it as a footnote on its analysis tables. It is nevertheless a real economic loss for home owners, and one that is only available for high wealth taxpayers who are cash rich. Cash-constrained home owners are at a loss.

– Courtesy of NAHB