The proposed change to the mortgage-interest deduction cap, which currently stands at $1 million, would only apply to new mortgages. This may also deter current homeowners in expensive markets from moving, because they would have to trade a mortgage that they can deduct on their taxes from one that they cannot. But even some current homeowners in blue states expressed consternation about the reform. “I need this deduction. Without this deduction, our tax bracket is too high,” Drew Kanevsky, a New Jersey resident who benefits from the mortgage-interest deduction, told me. Kanevsky, 38, owns two homes, one in Delaware and one in New Jersey, but told me that his family has worked hard to get where they are today. He thinks the proposed reforms target blue states like his; Kanevsky, however, says he’s a political moderate, and that with this proposal, the Republicans are “chasing us moderates away.”
Not surprisingly, real-estate and construction industry groups were vocal in their opposition to the proposal. The National Association of Realtors “cannot support a bill that takes homeownership off the table for millions of middle-class families,” said William E. Brown, the group’s president, in a statement. The National Association of Homebuilders also released a statement opposing the proposal, saying it “abandons middle-class taxpayers.” The GOP proposal itself, attempting to satiate those critics, has been portrayed in talking points as “preserving” the mortgage-interest deduction, rather than taking steps to eliminate it.
But Sinai, of Wharton, says fears of the proposed cap are overblown. The share of households with mortgages over $500,000 is very small, at about 6 percent, and even households that have mortgages over that amount can still deduct the first $500,000 of their mortgage when calculating their taxes. “It’s about as innocuous a limitation as you can do,” Sinai told me. “It only affects a couple percent of households, and they are the households that can buy expensive houses.”
It would take a lot of changes for a proposal like this to please progressives. Most groups who had called for reform, like the National Low-Income Housing Coalition, had proposed that the savings from reforming the mortgage-interest deduction be invested back into housing for low and moderate-income people. That’s not where the savings from the cap would go in this proposal. “If this were just a plan that capped the mortgage-interest deduction, I think we’d support that,” Hunter Blair, a budget analyst with the left-leaning Economic Policy Institute, told me. “But it’s a small piece of an otherwise huge tax cut for the rich and corporations.”
Housing advocates say that they have a better solution to encourage homeownership for among a broader group of Americans, though their proposal would likely not be feasible in today’s political climate. They want to eliminate the mortgage-interest deduction entirely and replace it with a 15 percent nonrefundable tax credit for all people with a mortgage. A tax credit would allow people who don’t itemize their taxes to get a tax break for spending money on a mortgage. It would make the tax benefits of having a mortgage available to lower-income homeowners, Yentel told me. The Tax Policy Center estimates that phasing out the mortgage-interest deduction and levying a 15 percent credit would raise $191 billion in government revenue between 2017 and 2026. Support for such a proposal, however, would depend heavily on where those savings were spent—on more tax cuts for businesses, or on programs that help the middle-class and poor.