Over the weekend at a fundraiser in Palm Beach, Mitt Romney was overheard offering some specifics about how he’d lower rates but eliminate deductions, including the suggestion that he would eliminate the deduction for high-income earners on their second-home mortgages.
The entire mortgage-deduction program is estimated to cost somewhere between $70 and 100 billion per year, but it might seem that Romney has circumscribed an absurdly narrow definition which wouldn’t make a dent in that — or would it? Without a substantial amount of research it’s hard to say just how much this would raise, but it’s not a negligible amount — or if it is, supporters of the president’s Buffett Rule can’t pretend their preferred policy does anything about the deficit, either.
The Buffett Rule is estimated to raise $4.5 billion per year. Mitt’s proposal could easily raise more than that.
There are 8 million vacation homes in America (making up most of the “second home” market, though some investment properties are eligible). Let’s assume half of those are owned by “high income” earners (the median income for vacation-home buyers is $99,500). The median price of a vacation home in 2011 (obviously one of the lowest values in years) was $121,000, but let’s assume the mean value of vacation homes for the top half of owners is $300,000. Fifty-eight percent of vacation-home buyers took out mortgages, though high-income buyers are much more likely to do so (because they itemize deductions and are deducting against a higher tax rate). So there would be, let’s assume, about 2.5 million vacation homes in America for which high-income earners are taking the deduction.
The average high-income home buyer we’re imagining, who pays a 25 percent tax rate and has a $300,000 mortgage, would be saving approximately $3,000 on his taxes each year (assuming a 30-year mortgage at 4 percent).
So, 2.5 million taxpayers, $3,000 each? By my back-of-envelope, classics-major math, that’d raise $7.5 billion per year.
Of course, some of these assumptions could go either way, but even if we assume cheaper homes, fewer people taking the deduction, etc., it’s quite likely to raise more than the Buffett Rule.
This is entirely leaving aside investment properties, of which there are another 41.6 million homes, but the interest on these isn’t eligible for the second-home deduction if the owner rents it out and claims tax deductions for that. There would surely be revenue to be raised there, too, though, as some of them can be counted as second homes.
After hearing about Romney’s proposal, Ezra Klein quipped this morning, “if all Romney is thinking of doing is limiting some deduction for high-income Americans, there’s no way he can pay for his tax plan.” That may well be true, but doesn’t he deserve some kudos for telling a Palm Beach fundraising crowd that he wants to make it more expensive to own a second home?