David Brunori (Executive Vice President of Editorial Operations, Tax Analysts) published an op-ed in Sunday’s Washington Post, Bush’s Tax Panel Has a Crazy Idea. Let’s Go For It:
Pity the poor McMansion owner. If the President’s Advisory Panel on Federal Tax Reform gets its way, those folks with the three-car garages, grand entryways, mega-kitchens and spacious bedrooms will lose the tax break they get for any portion of their mortgage over $312,000. In a place like Potomac, where the median sales price for a house is more than twice that amount, that could tear a hole in some fancy pocketbooks, depending on how much their owners have borrowed for their dream houses….
These are still just proposals cooked up by a bipartisan panel, and who can count how many similar proposals have gone nowhere? But it is a panel established by President Bush and charged with making the tax code simpler, fairer and more conducive to economic growth. For it to even consider going after the home mortgage deduction is a gutsy move — even if the president recoils at the very idea….
Don’t feel too sorry for these wealthy fellow citizens trying to keep a stylish roof over their heads. The rich Americans lucky enough to make the payments on those big mortgages would make up for most of the loss of mortgage deductions by facing smaller AMT burdens. Besides, if history is a guide, when the deficit eventually falls, the wealthy would recoup their losses with additional tax cuts.
There is simply no tax policy justification for allowing large home mortgage interest deductions. Both conservative and liberal public finance experts have long criticized the home mortgage interest deduction because it shrinks the tax base, thus requiring higher tax rates. That’s right, you are paying higher tax rates because of the home mortgage interest deduction.
The mortgage deduction also distorts economic decision-making, effectively subsidizing ever-larger home purchases by making it cheaper to borrow money. (And at the moment, borrowing is already pretty cheap.) That, in turn, has fueled the out-of-control real estate market. People have been buying houses that they might not otherwise have been able to afford. Yet, really smart people since the time of Adam Smith have warned against using the tax laws to distort markets. Perhaps it is time we listened.
The purpose of the mortgage interest deduction was to encourage home ownership. Most Americans would agree that this is a worthwhile goal. But home ownership hovers around 70 percent. The other 30 percent of Americans for the most part don’t earn enough money to take out $300,000 to $1 million loans for the starter home of their dreams. Maintaining tax benefits on home loans over $300,000 serves no purpose other than giving the best-off a break. Limiting those benefitswouldnot prevent anyone from basking in the joys of home ownership.
The only policy argument against reducing the amount of the mortgage tax benefit is that people who have already bought homes did so with the expectation that the deduction would continue. I agree that it would be unfair to change the rules after the fact. But transition rules can be designed to protect homeowners with such expectations.
There is even less justification for keeping the tax breaks for second home mortgages. These deductions also cost the federal government billions of dollars a year. The beach house may seem essential during the hot summers here, but we should recognize the tax break for what it is: a vacation subsidy.
In the end, the panel did the right thing by making these proposals. Members of Congress will be inundated with calls asserting that capping the benefits will hinder pursuit of the dream of home ownership. It will do no such thing. People do not buy houses because of the tax benefits. They buy houses so that they have a place to call home.
