The mortgage interest deduction has lots of enemies, including urban sprawl critics, tax reformers, deficient hawks, and personal debt gurus. But it also has a lot of friends: namely, the millions of Americans who use it to reduce their tax bills by $80 billion a year.
For a short refresher, here's how the deduction works. You buy a house, take out a mortgage, multiply the interest by your income tax bracket and get a number. You get to subtract that number every year from your taxable income. Good for you! But bad, perhaps, for the country. Richer folks tend to have larger mortgages, more interest and a higher tax bracket, which means the deduction is regressive. Moreover, the MID is a subsidy for debt. It rewards home owners for buying houses that are expensive compared to their taxable income. As the country digs its way out of debt valley, policy makers should think about ways to encourage saving instead of spending beyond your means.
But don't expect the mortgage interest rate to go anywhere. First, eliminating an $80 billion gift to rich folks with homes is tough sledding. It's even tougher sledding when you realize that slashing the subsidy would devastate already sickly home prices, since people are incentivized to buy bigger, costlier homes when they can write off the interest. It's tougher sledding still when you see who is getting the subsidy. It's not just the rich. It's the coastal rich. And that often means Democrats.
Folks who live in Maryland had the highest percent of tax returns claiming a mortgage interest deduction in 2008, according to fresh research from the Tax Foundation. Californians who deducted saved the most on their tax bill, an average deduction of nearly $20,000.
This is an interesting little gizmo to play around with, but here's one thing you quickly realize. The states that benefit the most from the mortgage interest deduction look a lot like the states that tend to vote Democratic, from the sapphire coasts to dependable blues like Minnesota. It's going to take quite an act of political bravery for the Obama administration to gut the deduction.
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