NAHB Rebuts Arguments for Repeal of MID

The cost, efficacy and fairness of the<bmortgage interest deduction (MID) are part of nearly every discussionrnin Washington about the tax code, housing policy, or the budget andrnthere appear to be about six sides to every debate. Economists fromrnthe National Association of Home Builders (NAHB) have weighed in withrnresponses to what they say are 10 “claims” about MID. </p

Claim #1: Benefits of the MIDrnaccrue mostly to the wealthy. NAHB says 86 percent of householdsrnbenefiting from MID have incomes under $200,000. That figure oftenrnincludes two household incomes.

Claim #2: Eliminating MIDrnwould not damage the economy or individual households. “Almostrnall studies” find it would reduce demand for housing which wouldrnlower home values for existing home owners. This would reducernhousehold wealth, put mortgages under water thus increasing defaultsrnand foreclosures, and reduce property tax revenues and thus localrnservices. Even a 1 percent decline in home prices would costrnAmerican households $185 billion in net worth.

Claim #3: Onlyrna small percentage of home owners claim the MID. Seventy percentrnof home owners with a mortgage claim the MID in a given year, andrnalmost all home owners benefit from the deduction at some pointrnduring their homeownership life cycle. Many mortgaged households dornnot take the deduction in the later years of a mortgage when interestrnpayments are small but probably had done so in earlier years.

Claimrn#4: Repealing the deduction would make the tax code morernprogressive. Repealing the MID would result in larger tax hikesrn- as a share of household income – for the middle class. For example,rnfor households with less than $200,000 in adjusted gross income, therntypical mortgage interest deduction is worth 1.76 percent of thatrnfamily’s AGI. For taxpayers reporting more than $200,000 in income,rnthe benefit falls to 1.5 percent of AGI.

Claim #5: Thernmortgage interest deduction incentivizes buyers to purchase a largerrnhome. While MID may have some relation to home size, evidencernties the choice of housing size more directly to family size andrnunderlying housing demand.

Claim #6: Renters do notrnsupport the mortgage interest deduction. Public opinion pollingrnhas generally found the MID to be popular with renters, most of whomrnhope to become home owners.

Claim #7: Because mortgages onrnsecond homes also qualify for the MID, taxpayers are subsidizingrnvacation homes for the wealthy. The second home deduction alsornapplies to families who own two homes in a single year as they movernfrom one to another or build a new residence. Where second homes arernseasonal the MID helps areas where the economy relies onrnrecreation/tourism. Also, the Consumer Expenditure Survey found thernaverage income of a household with a mortgage on a second home isrn$71,344.

Claim #8: While the MID supports homeownership,rnfederal policy neglects renters.rn In dollar terms Housing policy support is roughlyrnproportional to the renter/owner ratio in the total population.</p

Claim #9: Since not all home ownersrnitemize, a credit would be better for the market. This wouldrndepend on how the credit was structured, that is its size and what itrnincludes. Some current proposals would increase the tax burden onrnhomeowners.</p

Claim #10: There is too much policyrnsupport for housing. Discussions of tax policy focus on thernfederal level and often ignore the tax burden placed on homeowners onrnthe state and local levels.

NAHB said its informationrnrefuting the ten claims is derived from the Internal RevenuernServices, the Census Bureau, and estimates from other sources.

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