Eliminating the Home Mortgage Deduction

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Since being put in office, the Obama administration has been putting out feelers about possibly reducing and/or limiting the home mortgage interest deduction.  Now after unbridled deficit spending, the administration is once again looking at the home mortgage interest deduction.

Rather than directly taking blame for reducing or eliminating this wildly popular subsidy, Obama appointed a panel to look into ways of cutting the deficit. To say this panel was bipartisan would be a stretch, as few of its members were conservative thinkers.  What better way to eliminate a popular deduction than by shifting the blame to some bipartisan commission’s recommendation?

In a recent small poll, five out of the eight professors/economists thought that reducing or eliminating the home mortgage deduction would be a good way to cut the deficit.

Some of the arguments in favor of elimination of the home mortgage deduction are:

• Other countries, such as Canada and England do not allow the deduction and still have achieved high homeownership rates.
• The US has gone way too far in trying to subsidize the housing sector; freeing up investment capital to make working Americans more productive would be a better use of our resources than building bigger houses.
• Why should taxpayers subsidize the purchase of multimillion dollar homes? This subsidy promoting home ownership over renting is a debatable social goal, with benefits far below the cost to all taxpayers from raising annual government deficits.

Some of the arguments in favor of not eliminating the home mortgage deduction are:

• Congress should not pull the rug out from home buyers in an already depressed housing market.
• The home interest rate deduction is so ingrained in the economy and the housing market that eliminating it would cause some serious disruptions.
• The elimination of this deduction would be extremely unpopular politically, as there are now three generations of American homeowners accustomed to this deduction.
• Any action taken to eliminate or reduce this deduction over the coming years could have a further EU eroding effect on current home value because it is the deductibility that contributes to value and elasticity.

To make this bitter pill more palatable, there has been talk of coupling it with the lowering of marginal tax rates. Although this may be an acceptable trade off at the outset, these lower marginal tax rates would be subject to change with each new administration.

First the government gets us into trouble with unbridled spending; then the government proposes new taxes to lessen the problems that they created.  As we move forward in this period of hope and change, one of the changes looks as if working Americans will have much less disposable income.

With the recent shellacking that the administration took in the midterm elections, some believe that the home mortgage interest rate deduction will be safe for the foreseeable future. I hope they are correct, but to me it looks like it is inevitable the Obama administration will still push for a reduction and/or total elimination of the home mortgage interest deduction, over a period of years.

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