"In case there is any doubt I want you to know we will preserve the part of the American dream which the home mortgage interest symbolizes."
-President Ronald Reagan to realtors, 1984
Founded in 1872 on the Santa Fe Trail and the Atchison, Topeka & Santa Fe Railroad, Dodge City--"the Cowboy Capital"--has a colorful history. Buffalo hunters--known as "stinkers"--shipped 1.5 million hides by 1878. Next came 5 million head of cattle driven out of the southwest on famous cattle trails. With all that quick money being made, the town quickly gained a reputation for lawlessness. Lots of hard liquor, "soiled doves," and gunfights in the streets. Lawmen like Wyatt Earp tried to preserve order.
In modern Dodge City local businesses try to profit from the city's historic past. But in 2012 Kansas Governor Sam Brownback wanted to lower the states income tax rate, and repeal of the state's historic preservation tax credit was one his proposals to pay for the cost. Dodge city businesses did not like it and real estate developers across the state protested. In the end Brownback got his reform but the credit was preserved.
In 2013 Governor Brownback has set his sights on repealing the mortgage interest deduction. He needs more revenue to keep his signature income tax rate cuts from ruining state finances. In an obvious effort to test the waters for national office, Governor Brownback is taking his tax reform message nationwide. Needless to say, real estate agents in Kansas are vowing a tough fight to preserve the deduction.
The Kansas tax reform fight is of national importance. Brownback's efforts are a bellwether for federal tax reform. If the governor can't cut the mortgage interest deduction in a heavily Republican state, it does not bode well for bold federal tax reform plans that are depending on trimming the federal mortgage interest deduction to pay for lower rates.
I believe my views are consistent with those of most economists when I express my hope that Brownback succeeds. Although the mortgage interest deduction is the tax break politicians and the public are most protective of, it is probably the least defensible on policy grounds. The housing lobby says the deduction promotes homeownership and that is good for neighborhoods and families. Of all the convoluted excuses for tax breaks, this is one of the weakest I've ever come across.
The reality is the United States has too many homes and many of them are too large. This draws capital and resources away from productive sectors of the economy. Sure, while the housing sector is still in recovery, we don't want to add to its problems. So why not provide an incentive to buy houses now by announcing that homes purchased after 2014 will get a 5 percent haircut on their mortgage interest deduction? Then cut 5 percent per year until the deduction is eliminated for homes purchased after 2034. The United Kingdom, Canada, and Australia have no mortgage interest deduction, and their homeownership rates are just fine.