By Nicole Lindler
If you own your home, you probably can recall the very moment you went from renter to homeowner; your realtor delivered the good news that your offer was accepted, your loan closed, and shortly afterward you received the keys to your new home. Better yet, you learned you were allowed to deduct the interest on your mortgage up to $1 million, plus an additional $100,000 for equity debt. This policy, known as the Mortgage Interest Deduction (MID), is on the chopping block as part of the newly introduced House GOP tax plan, and that’s a good thing.
The House Republicans are proposing two changes: cap the MID at $500,000 and double the amount of most families’ standard deduction. Both changes would effectively reduce the value of the MID in the first place. As it stands, to claim MID homeowners must itemize all deductions on their taxes line-by-line —accounting for things like property taxes, travel, investment counseling, business insurance premiums, legal fees, and of course, the MID itself. Historically, only about a third of taxpayers have needed to itemize because their write-offs exceed the standard deduction ($13,000); not surprisingly, these households happen to be the wealthiest among us.
Since its expansion through the Tax Reform Act of 1986, the MID has acted as America’s biggest public housing subsidy for the wealthy. On average, the MID costs $59 billion dollars per year in federal revenue. Over the next decade this amounts to an estimated $900 billion dollars that will be passed onto Americans already making well-over six figures a year. At a time when homelessness and a lack of affordable housing is at an all-time high, we have to wonder if paying rich households to buy larger, more expensive homes was the right policy. The federal government has been explicit in its support of using tax breaks to create wealth, but only those who have large amounts of taxable income reap the most benefits.
Reform to MID may be a step in the right direction, yet it is only halfway there. House and Senate Republicans alike have proposed to cut the corporate tax rate by 20 percent in their new bill— a move that would no doubt be financed by the hundreds of billions of dollars in savings delivered by capping the MID. However, there are no current plans to direct those savings to increase the supply of affordable housing; this where the bill goes terribly wrong. Instead of an economic band-aid, low-to-middle income Americans will face yet another wound.
Tax dollars have to be directed at low-and middle-income households or they will continue to face high housing costs under growing supply constraints. It is unreasonable to expect a cut in corporate tax rates will spur economic growth, just as it is to expect the reform of MID alone will alleviate our housing problems if the dollars are not used to build more affordable housing. More and more Americans are spending half of their monthly income on housing, leaving little room for other necessities. This speaks to the core of whom we have become as a nation. We have commoditized housing into a luxury good and normalized subsidizing the mortgages of the rich, while over half a million Americans are homeless on any given night.
As affordable housing advocates have proposed, a responsible policy would be to lower the cap on MID to $500,000 and convert the deduction to a 15-percent tax credit without an itemization requirement. This would allow 15 million more low-to-moderate-income homeowners to benefit from MID, while the savings could be channeled into building more affordable housing for those in the cities that need it. But first, Congress has to get onboard. Radical reform to MID will be counterproductive if its savings are used to offset huge corporate tax cuts or to take aim at wealthy blue states where the majority of taxpayers who claim the deduction live.
Under the reform, current homeowners would be grandfathered into MID, leaving their deduction unchanged; for everyone else, new homebuyers and real estate speculators alike, the reform would mean reducing the commoditization of homeownership – especially for those of us in hot real estate markets such as California, New York, and New Jersey where average home values and attached mortgages are well over the proposed $500,000 cap. It is time to reform this aristocratic policy and to help those who actually need the subsidy.
Indeed, reform of MID would have a modest effect on overpriced homes – it would make them cheaper. Again, this is a good thing. With California facing a shortage of over 1.8 million affordable homes, and the average rent for a 1 bedroom apartment in San Francisco and New York City topping $3000 per month, MID reform is a practical means to finally reduce real estate market speculation and stronghold NIMBYism. Reform would mean leveling the playing field on a regressive policy in order to potentially improve housing stability for millions– even if it looks like a simpler tax code and cost saver to House Republicans. They have to get it right. The stakes are too high for people struggling to afford homes for Congress not to.
Nicole Lindler is current Goldman School of Public Policy graduate student and former real estate broker turned affordable housing advocate.