The Republican-led Congress may be geared to take up tax reform after the summer recess, and it may affect policies related to housing for millions of Americans. Notably, the Trump administration has indicated that it supports eliminating the Mortgage Interest Deduction, which allows homeowners to pay lower taxes.
The real estate industry is worried, as eliminating this deduction could negatively affect many homeowners and potentially cause home prices to fall. But shifting housing policy away from this tax credit may also be a boon for affordable housing.
As GGWash contributor David Meni explained earlier this year, the Mortgage Interest Deduction is a mechanism that allows taxpayers to itemize their mortgage interest, decreasing the amount of taxable income they have. MID is an expensive program, costing around $70 billion a year in lost tax revenue – well more than the amount the government spends on public housing – but it mostly benefits higher earning households. Accordingly, the program is ripe for reform.
The Trump Administration is proposing to raise the standard itemized deduction from $12,000 to $24,000. This is not directly aimed at MID, but it would reduce the amount of households that can benefit from deductions, such as the MID. In a region such as our own, with a large share of high-income earners, this could have a big impact, especially for homebuyers making between $68,540 and $129,422 looking to buy homes priced between $358,000 and $676,000.
Additionally, some reform proposals would only allow the deduction for the first $500,000 of a mortgages, compared to the first $1,000,000 today. This will reduce the amount of a mortgage that buyers can write off in taxes for expensive mortgages. Nationally, this will increase government revenue while only affecting a small percentage of affluent buyers. But in our area, where mortgages often exceed $500,000, this would affect a much larger share of buyers.
How the MID is reformed really matters
Both libertarian and progressive groups support reforming the MID, but disagree on how to do it. But there are a number of challenges in reforming the MID. As David points out in his post, reforming MID would not reduce homeownership, since the program’s current structure promotes expensive mortgages over access to loans.
On the other hand, the Trump proposal to increase the standard deduction would reduce the population of households that could benefit from the MID to an even smaller and richer group.
Meanwhile, it could cause a short-term drop in housing prices. With fewer people using the MID, fewer people would look to buy homes and prices could lower slightly. Accordingly, several observers suggest phasing in reductions to the MID over a period of time.
The National Low Income Housing Coalition goes a step further. They support an overhaul of the MID, but warn that the savings from reining in the program must be reapportioned for providing affordable housing to those who need it the most. Trump’s current plan does not make any mention of where the savings would go, but the administration’s reluctance to support affordable housing isn’t promising.
In this hyper-partisan age, there is very little agreement on important issues. In the case of MID, however, a wide coalition of actors is ready for reform. There simply is no reason that most government money on housing should go to a segment of the population that doesn’t need it.
Unfortunately, this is no guarantee that MID reform will end up benefitting those in need, or if tax reform – an highly complicated issue – is even an achievable goal in the near future.