Mortgage Subsidies Disproportionately Go to Rich Taxpayers

by Veronique de Rugy

Marty Sullivan has written an interesting piece about the mortgage-interest deduction: who’s getting it, and how much various zip codes (i.e., income groups) receive per person. His study shows that the mortgage-interest deduction is a subsidy for the rich, not for the poor.

The tax benefit provided by the mortgage interest deduction flows overwhelmingly to rich families like those portrayed in the hit television series Beverly Hills, 90210. We’ve done the math and, as shown in the figure, the average annual per-person tax benefit provided by the mortgage interest deduction for the residents of 90210 is $1,873. For the residents of Clarksdale 38614, it is $45.

The difference between these two zip codes is representative of a similar gap between the ten richest and ten poorest zip codes. Why is that?

There are three reasons for this huge disparity. First, the rich have larger houses and larger mortgages than the poor. Second, the deduction is available only to itemizers. While almost all high-income taxpayers itemize deductions on their returns, very few of the poor do. Finally, the rich have much higher marginal income tax rates than the poor.

Unfortunately, while most tax experts agree that the deduction should be trimmed or eliminated, no member of Congress seems willing to do it. There have been some good suggestions for ways to trim it — first, from the 2005 Bush tax commission:

In 2005 President Bush’s advisory panel on tax reform recommended replacing the mortgage interest deduction with a tax credit equal to 15 percent of mortgage interest paid, with qualified mortgages limited to the average regional price of housing (ranging from about $227,000 to $412,000).

Then two from the CBO in 2009:

The first would have reduced the maximum mortgage eligible for the deduction from $1.1 million in 2012 to $500,000. The second alternative, similar to the 2005 proposal, would have replaced it with a 15 percent tax credit for interest on mortgages below $500,000.

And the recent deficit commission and the president’s budget each offered a proposal:

. . . a 12 percent nonrefundable tax credit, with a $500,000 cap on mortgages and no credit for interest from a second residence and equity. And in his budget, President Obama has proposed limiting the value of all itemized deductions so that high bracket taxpayers would receive benefits as if they were 28 percent taxpayers.

My suggestion? I would rather we didn’t have any subsidy for housing, or anything else, and instead lowered everyone’s marginal tax rates.

Thanks to Jason Fichtner for the pointer.