Tax Analysts Blog

Will Republicans Limit Mortgage Interest?

Posted on Dec 3, 2012

Until recently it was just a few wild-eyed tax reformers (like myself) who wanted to take away your mortgage interest deduction. Now that Republicans have drawn a no-tax-rate-increase line in the sand over which they will not cross, leading Republicans now find themselves in the position where they are implicitly advocating limits on popular tax breaks.

There are many ways of doing this. But the one now getting the most public attention is an overall cap on itemized deductions originally floated by Mitt Romney during the campaign. According to the Tax Policy Center, a $50,000 cap would raise $61 billion in 2015 and $749 billion over ten years. Another idea comes form the President’s last budget (see "Green Book", p. 131), which proposes limiting the tax reduction from deductions and exclusions to 28 percent of their dollar amount.

Other ideas that would directly target mortgage interests are: (1) elimination of deductions for interest on mortgages of second homes (mentioned by Romney during the campaign); (2) eliminating deductibility of home equity loans (currently capped at $100,000 of debt); (3) reducing the current cap of $1,000,0000 (set in 1987) on qualified mortgage debt; and (4) changing the deduction to a credit, as proposed by the Bowles-Simpson and Rivlin-Domemici commissions.

The fate of the mortgage interest deduction will depend greatly on whether it is deemed a sacred middle-class tax entitlement or a sop to the rich who buy houses that are too big for them. So which is it?

The answer depends on how you look at the data. In the first figure below we see that the average mortgage interest deduction is much larger for the over-$200,000 crowd than it is for middle class. That makes the mortgage interest deduction look unfair and leaves it politically vulnerable.


However in the second figure we see as a percent of income tax liability the value of the deduction is larger for the middle class than the rich. Even though the rich have bigger houses and higher tax rates, the deduction means more to the middle class because the middle class spends a much larger portion of their income on housing that do the rich.


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