Tanvi Misra is a staff writer for CityLab covering immigrant communities, housing, economic inequality, and culture. She also authors Navigator, a weekly newsletter for urban explorers (subscribe here). Her work also appears in The Atlantic, NPR, and BBC.
In theory, the GOP’s provision makes sense. But in context of the rest of the tax plan, it does exactly what it was doing before—benefit the rich.
On Thursday, House Republicans revealed their much-awaited tax reform legislation. One of its most-discussed features is a modification to the mortgage interest tax deduction (MID): The bill proposes capping the mortgages on new homes for which interest can be deducted at $500,000—half of the $1 million in home loans American can currently claim this tax break on.
Taken in a vacuum, this is not a bad move. But in conjunction with the other parts of this Republican tax plan, it achieves the same thing it was doing before: recycling inequality.
But capping the mortgage deduction to pay for tax cuts for the rich shifts $$$ from upper-middle class to heirs & heiresses—a terrible idea.— Justin Wolfers (@JustinWolfers) November 2, 2017
Economists and housing advocates have been making a case for reforming the MID for a while now. The ostensible goal of the MID tax break is to boost homeownership, which research shows it does not actually do. That’s because this subsidy overwhelmingly benefits rich taxpayers, who are already well-positioned to buy homes. In 2014, households bringing in over $100,000 claimed 82 percent of these benefits. It makes sense; these households tend to have larger mortgages, and therefore, higher interest payments to deduct. They are also much more likely to itemize instead of a opting for a standard deduction, because they get a lot more cash back that way.
But even among MID beneficiaries, the folks who take out mortgages higher than $500,000 are few and far in between. According to a National Low-Income Housing Coalition (NLIHC) report, only 5 percent of total mortgages taken out in between 2012 and 2014 were over this threshold. Most of these were concentrated in a few coastal housing hotspots in Washington D.C., Hawaii, and California. Here’s a breakdown by geography:
MID, in other words, is “a generous public-housing program for the rich,” as sociologist and Evicted author Matthew Desmond wrote in the New York Times Magazine. For that reason, housing advocates like NLIHC support a $500,000 mortgage limit, estimating that it would save the government $95.5 billion over a decade. They also recommend converting the deduction to a tax credit to fold in households who do not currently benefit.
Are there drawbacks to these modifications? Eh, perhaps. In places where housing is already in short supply, home values might decrease modestly with a drop in demand, economist Edward Glaeser told Desmond in his Times article. “Most homeowners wouldn’t even feel it,” he added. (Some have suggested capping the mortgage amount even further or getting rid of MID altogether—although those measures would be even a harder pass for the rich people who currently gain from the tax break.)
So when viewed as a stand-alone provision, the MID modification proposed by the House Republicans seems like it’s on the right track. And it would be—if the billions gained in revenue were to go toward funding housing choice vouchers to help cash-strapped renters live in half-decent areas, or to the National Housing Trust Fund, which helps provide permanently affordable housing for the poorest families. Instead, the revenue would be used to pay for modifications to the estate tax, corporate tax, state and local tax deductions, and other provisions that would disproportionately benefit the richest of the rich, analysts and advocates say.
“The tradeoff is that revenue is going to even higher-income people,” says Chye-Ching Huang, deputy director of federal tax policy at the Center on Budget and Policy Priorities, in a press call today. “It’s tilted towards the top.”
For what it’s worth, this provision in its current form isn’t a huge hit in general—home builders, Realtors, and even some Republicans hailing from areas that benefit from MID are voicing their displeasure. Perhaps it isn’t meant to be a good-faith effort to fix a broken policy; it is just sleight-of-hand that would end up making that policy’s essential inequities even worse.