Could have supported interest deduction cap

One piece of the Trump administration and U.S. House Republican proposed federal tax overhaul I agreed with appears to have already fallen amid an onslaught of the lobbyist horde.

The White House budget proposal called for a lowered cap on the home mortgage interest deduction. House Republicans agreed and included the lesser cap in their proposal alongside a requirement that the deduction be limited to primary residences. Members of the Senate were immediately confronted by real estate lobbyists, so the lowered cap, estimated to produce up to $300 billion in revenue during the next decade, is not part of the smaller chamber’s plan.

Before any readers choke on their Saturday morning coffee, let me explain that I’m not completely against the mortgage interest deduction, or the type of behavior it’s intended to create. It’s a carrot to entice people to make a very physical investment in a community through purchase of a home. As far as behavior modification by tax code goes, it’s better than most. The deduction encourages personal investment in a place, which often translates into personal investment in the local economy, schools, government, neighborhoods and so-forth. For those in the middle class, real estate has long been viewed as a driver of wealth. And at this moment in history, many in that demographic use their home as their retirement fund.

The problem is the cap and the ability to write off mortgages on other property, like vacation homes. Currently those who pay a mortgage and itemize deductions are eligible to write-off interest on loans up to $1.1 million worth of principal. The proposed reduced cap was half of that amount, or $500,000.

So, currently, people can write off 100 percent of the interest paid on up to $1.1 million of debt secured by first and second homes and used to acquire or improve the properties. The very wealthy can claim yachts as a second home and deduct the loan interest.

The elevated cap — and especially the ability to include interest from a second mortgage — isn’t creating a community-building result. Instead, it’s encouraging people to buy bigger, more expensive homes — and driving up housing prices in the process.

Reducing the cap would have reduced the amount of mortgage interest some higher-income taxpayers could use to offset their taxable income. In 2013, for instance, 73 percent of the total value of the deduction went to the richest 20 percent of households. And 15 percent went to the top 1 percent. (A very similar scenario is at play for federal deductions of state and local taxes: 80 percent of the benefit goes to the richest 20 percent, and 30 percent to the 1 percent.)

Finally, nearly each time I write about the need for more affordable housing, responses lament the money that government “forks out” to low-income households. Many miss the fact that government housing subsidies to the poor and middle-class are dwarfed by subsidies that flow to the top 20 percent of earners. In 2015, the government provided the top 20 percent more than $85 billion in housing assistance. The bottom 80 percent, which includes far more households, received less than $55 billion.

This column by Lynda Waddington originally published in The Gazette on Dec. 2, 2017.