Tax Analysts Blog

Mortgage Interest 90210

Posted on Mar 7, 2011

Beverly Hills 90210 and Clarksdale, Mississippi 38614 both have a population a little above 20,000. But that’s where the statistical similarities end. IRS data show that in 2007 adjusted gross income in 90210 was $5.6 billion, more than 20 times larger than the $266 million reported in 38614. In Beverly Hills, 47 percent of AGI were dividends and capital gains. In Clarksdale the figure was 7 percent. In Beverly Hills only 4 percent of filers claimed the earned income credit while in Clarksdale 44 percent did.

Providing approximately $100 billion of tax benefits annually, the mortgage interest deduction is the nation’s largest housing program. So, where are these subsidies distributed? Readers with some scintilla of idealism left might hope it goes to the most in need. So naïve! The tax benefit provided by the mortgage interest deduction flows overwhelming 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 below, the average annual per person tax benefit provided by the mortgage interest deduction from the residents of 90210 is $1,873. For the residents of Clarksdale 38614 it is $45.

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

The gap in benefits between Beverly Hills and Clarksdale is only one example of the unfairness of the mortgage interest deductions. There are dozens of zip codes like 90210 with exorbitant housing. There are hundreds of impoverished zip codes like 38614 where the mortgage interest deduction provides only trivial benefits. Some examples are shown in the table below.

On January 6, 2011 Rep. Gary Miller, Republican from Orange County, California introduced House Resolution 25 “expressing the sense of the Congress that the current Federal income tax deduction for interest paid on debt secured by a first or second home should not be further restricted.” There are currently 41 cosponsors and the list is growing. It is hard to believe that members of Congress who put a “do not disturb” sign on the mortgage interest deduction could ever really be serious about reforming the federal income tax. If Congress cannot even bring itself to restrict one of our largest tax breaks, especially when those getting the lion’s share of the benefits are those least in need, where will it cut?

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