The Republican party has backed off their defense of the mortgage-interest deduction for homeowners, defeating an amendment which would have put the party on the record for preserving the deduction as a matter of policy.
From a Republican National Convention delegate, disagreeing with the apparent platform shift: “The mortgage-interest deduction is high on the list for all Realtors…[and] the last vestige of why people would be interested in buying a home.”
∙ Republican Platform Won’t Protect Mortgage Tax Deduction [Bloomberg]
Gee, this is the first time I can recall actually agreeing with something that is an official position of the republican party!
Too bad it’s got no chance of ever becoming adopted into law.
While I agree that repealing the mortgage interest deduction would be disastrous, to be clear, if the Republican Party does not repeal it, then their so called Balanced Budget plan collapses even more. They have to have the savings from the mortgage interest deduction repeal to come even remotely close to offsetting all of their tax cuts to corporations and wealthy people.
I actually disagree with “anon” and think this does have a chance of becoming law; the mortgage interest tax deduction is the third most expensive tax expenditure in the federal budget, at about $89 Billion as of 2008. We can’t afford it anymore, especially since we’re borrowing almost all of that money and contributing to the deficit and national debt.
That said, the RNC delegate quoted above was from the Virgin Islands, and presumably the “vestige of why people would be interested in buying a home” she’s referring to is the interest in buying second or third or even fourth homes in vacation spots like St.Thomas, not first-and-only homes that non-wealthy people live in.
I read somewhere that Romney already had the deduction for non-first, owner-occupied homes in his sights as a tax expenditure to eliminate.
I take issue with the statement that we cannot afford the mortgage interest deduction anymore. If you wish to cut 100 billion a year, cut it out of the defense budget.
The government should neither encourage nor discourage homeownership
Why should I give up my mortgage deduction on my taxes only to allow our government to spend TEN BILLION DOLLARS A MONTH in Afghanistan?
You should have never had it in the first place. It’s terrible policy all around. The fact that American defense policy is also terrible is a complete non sequitur.
I’m with anon on this being the first time I can remember agreeing with a Republican platform item. Too bad the rest of it is completely insane.
Why should I continue to pay federal income tax only to allow our government to spend TEN BILLION DOLLARS A MONTH in Afghanistan?
Perhaps it wouldn’t be a bad idea to reduce the mortgage tax deduction over several years, rather than eliminate it. Eliminating it outright would have a pretty big impact on property values and our economy.
If you have to have the Mortgage Interest Deduction to make the numbers work for you, then you’re probably a bit too tight in your financing.
Of course if you go see a mortgage broker, he’ll probably push you towards the highest mortgage amount you can get approved for.
I always set up my plans using the most basic “what-ifs” (natural disaster, job loss, divorce, health issue, unexpected relocation, change in the tax code). If only one of these events would put me in trouble, then it’s a deal breaker. If it would take 2 of these, then it’s safe enough to try. If it’s 3 or more, I can sleep like a baby and it’s a no brainer.
“The government should neither encourage nor discourage homeownership”
At this point, that is probably true. There was once a point where the federal government may have needed to stick its beak in to facilitate the secondary mortgage market, but I think we’re past that. There are still way too many subsidies that don’t make sense.
The mortgage interest deduction actually doesn’t have that long a history. Before the Internal Revenue Code of 1986, many more kinds of interest were deductible, and this was somewhat of a historical artifact. The drafters of prior tax codes had always intended that *business-related* interest should be deductible, and when the early codes were drafted, the vast majority of interest being deducted was business-related. Later, when the consumer credit market became more mature, all kinds of interest were being deducted, and the 1986 code pared back some of the deductions in order to raise revenue while cutting overall rates because it actually made no sense to give a tax deduction on credit card interest, for example. The mortgage interest exception is expensive, and doesn’t really accomplish that much anymore, and is highly regressive to boot, and it’d be a positive change in our tax code to get rid of it.
There is nothing wrong with using tax policy to influence behavior. Our government should encourage home ownership. Our government should also protect us through regulation from banks that are stealing from regular people.
I agree that it should be phased out eventually. I think a good first step would be to bring the mortgage interest deduction in line with the conforming loan limit. Keep the $100,000 home equity mortgage deduction and that means the first the interest on up to $517,000 of mortgage borrowing is deductable (this would be for years 1-4). Step 2 (year 5) would be to eliminate the extra $100,000 home equity allowance. Step 3 (years 6-10) would be to phase out the $417,000, which would mean a reduction of ~$83k per year.
Spreads out the impact to homeowners over 10 years allowing them to adjust their finances gradually. Also spreads out the pain to home prices over that time, with the biggest impact being to high end homes right at the start. The fact that government currently fully subsidzes the purchase of million dollar homes is crazy.
If “The government should neither encourage nor discourage homeownership”, then don’t forget to get rid of property taxes, too.
And, don’t forget to get rid of the current special treatment of capital gains when you sell.
A million dollar home in the Bay Area, Chicago or New York is a lot different than a million dollar home in the central valley or the South.
It is also not a full subsidy for a million dollars, it is a relatively small tax break.
Without republican support, this deduction will be traded almost immediately for preserving something or gaining something. It’s over. It’s just a matter of the right time, and then it will be gone.
The country needs more money to maintain the status quo and a fight was brewing over where it would come from. Either we take it from the rich or we take it from homeowners, and homeowners have now been thrown under the bus.
This is a done deal or they wouldn’t have voted this way. Repubs will wait for the right time to trade it for something and trade it they will.
All the parties now want it gone, so you can kiss it good bye. Not only will homeowners suddenly have higher net monthly payments to make, thereby crushing their finances and causing a massive sell off in high price areas (which are democratic strongholds, BTW, so who really cares), but any equity they have will evaporate as prices collapse in order to compensate.
Should be fun to watch.
I enjoy reading your worst case scenarios, Tipster. I can see it happening with 2nd and 3rd homes, but eliminating the mortgage deduction for primary residences will never happen. There’s way too much at stake for the real estate/banking industry, which is barely making a recovery right now AND this is one thing that middle class people will go out and fight for. Nothing else seems to get people riled up in this country.
“There’s way too much at stake for the real estate/banking industry, which is barely making a recovery right now AND this is one thing that middle class people will go out and fight for. Nothing else seems to get people riled up in this country. ”
Yes, despite the fact that it doesn’t affect a lot of truly middle class people. Large numbers of people don’t itemize and never benefit from the mortgage interest deduction, even though some of them seem to think they do.
Also p3p, no problem with getting rid of the preferential rate on cap gains for homeowners too. As for property tax, that’s different from strictly homeownership, and there is a benefit to ensuring people make better use of land (assuming Prop 13 doesn’t screw everything up).
Again tipster makes every occasion a reason to claim an upcoming “massive selloff in high price areas”. LOL. I’ve heard that one before. It’s a good thing I am not on the sidelines waiting to get something for nothing.
About the tax credit. The US is 65%+/- homeowner and therefore I think the exemption will not be touched. For instance SF is 60% renters and no one is questioning rent control for fear of an electoral backlash.
Plus the bankers will not allow this to happen. A subsidy for RE always finds its way into Wall Street one way or another.
“There is nothing wrong with using tax policy to influence behavior. Our government should encourage home ownership. Our government should also protect us through regulation from banks that are stealing from regular people.”
Our government should also protect us through regulation from the NAR and how homes are bought and sold. No consequences for lying or poor ethics because it is self-regulated. Even good realtors treat poor ethics from other realtors as something that shouldn’t happen but is not a big deal. And . . .the bankers wouldn’t allow that to happen?? It’s the NAR that would mount a huge and very expensive lobbying campaign against this– that much is guaranteed.
Re: “As for property tax, that’s different from strictly homeownership, and there is a benefit to ensuring people make better use of land (assuming Prop 13 doesn’t screw everything up).”
That’s irrelevant. As we all know, if you tax something, that has a tendency to influence the demand for it. Therefore, property tax is by definition the government discouraging homeownership. So, if the premise is that “The government should neither encourage nor discourage homeownership”, then property taxes must also go.
well, property taxes are not applied only to homes but to all property. So they do not “encourage or discourage” homeownership as opposed to any other use of land. Property taxes are perhaps the most sensible tax around in terms of social good as they encourage the highest and best use of land (and each owner can decide what that is).
Property taxes are very easy to avoid. Don’t own property.
The flyover states don’t benefit much from the deduction. They have bigger families (more deductions), don’t have the high incomes, home prices are lower, and so they aren’t going to care if this goes away or not.
Really, the cities that benefit from that deduction are democratic leaning cities like SF, LA, NYC, DC, Boston, etc. So your 65% number is irrelevant. The issue is who benefits, its mostly democratic cities, and so the repubs are going to force the issue and make the dems raise taxes on their own constituents. The dems will be backed into a corner, defending rich homeowners who itemize, and so, without republican support, which is now gone, its a done deal. Its over. The only thing left now is the timing. Politically, the last possible shred of hope for keeping it alive just evaporated.
There will be some lip service paid, but that’s about it. BTW, Obama has always been opposed to the deduction. He wants it gone and the repubs are now stepping out of the way.
Ha ha, you guys are being screwed right to the wall to protect my tax rate. Thanks!
As for the property tax, what the hell are you all smoking? The government needs MORE tax revenue, not less. The property tax is not going anywhere. Homeowners have a vetted source of income and that income will now be repeatedly attacked. Plain and simple.
Think of home ownership as an implied “kick me” sign. That’s what it is now. It’s a source of money to be harvested and with housing starts depressed to near record lows, it doesn’t provide many jobs, so it’s *going away*.
tipster, your logic is valid, but you forget that it ain’t the red meat plebes in flyover country who call the shots with the repubs. It’s the bankers and billionaires. The bankers will NEVER, repeat NEVER, let this huge subsidy to the banks expire. And the billionaires will not accept the removal of a deduction that they actually benefit from (for primary and second homes) because to their minds that is the same as a tax increase.
This deduction ain’t going away in your lifetime or mine. The kicker is that the red meat plebes you describe don’t really benefit from this deduction, but they are a bunch of dumb**cks who THINK that they do. So they will scream at any politician who seriously tries to touch it. This RNC move is a political charade.
I agree with anon, except for the Billionaire statement. I am sure they do not give a rat’s behind about a few bucks in deduction. It’s peanuts compared to their offshore accounts. But low-digit millionaires or mere 1/2 millionaires? Sure they care!
Billionaire’s care about every single penny..
Billionaires will throw millionaires under the bus just for the fun of it.
I’m a homeowner who uses the MID.
The government should be agnostic about homeownership.
The MID should be phased out over, say, 30 years.
Realtors care because the decline in home prices will cause their commissions to decline.
The major impact on new home sales will be cheaper land and/or smaller homes. Neither sounds horrible.
The MID should be phased out over, say, 30 years.
So should Prop 13
As I explained earlier, people who had to include this tax deduction have only themselves to blame if it is sunset.
But the number of houselholds underwater is still significant enough for everyone on the political spectrum to think twice about triggering a correction. Plus most of this correction would seep through consumption, as it would decrease disposable income. Right in the middle of a recovery, this would cause whoever votes for it to be the one pushing the country into another leg of the Great Recession. This would basically amount to take from income to fill a black hole with nothing really positive coming out. In short, a recipe for deflation.
It’s better to grow out of a deficit than shrink our way back into it.
For a jumbo of $625k loan at 4%, the deduction gets almost $700 back per month assuming around 0.33 federal tax rate. Tell me how that would not have a shock on affordability on the demand side.
That said, if they allow deductions to buyers before a certain date, they could create a stampede of buyers… Or the rumor of it, amplified by our friendly realtors would do the trick too.
Re: “Property taxes are very easy to avoid. Don’t own property.”
Thanks for illustrating my point exactly, that property taxes, whether intentional or not, whether “good” or not, whether they apply to other things or not, they are a government tax on homeownership, and thus discourage homeownership, and therefore if “The government should neither encourage nor discourage homeownership”, they should be removed. Feel free to leave them on other types of property where they won’t discourage homeownership.
Either you believe that “The government should neither encourage nor discourage homeownership” or you don’t. You seem to be diluting that by saying “The government should neither encourage nor discourage homeownership unless it is for some ‘good’ purpose”.
Ref Prop 13 sunset, agreed but you should be able to pay accumulated taxes over the prop 13 escalation schedule at the time of sale. Given the rapid rise in prices from 1997 to 2008, someone might have had to move 2 or even 3 times as various areas were inflated. In Fairfield, for example, someone handling the prop taxes on a merchant built 300k house might have had to move 3 years later when the price went to 500k, then 3 years later when the price went to 700k. The tax system should not force constant disruption of communities.
p3p, I’ll spell it out for you. It ain’t rocket science.
If you own property and farm on it, you owe property taxes. If you own property with a power plant on it, you owe property taxes. If you own property with a retail store on it, you owe property taxes. If you own a vacant lot, you owe property taxes on it. If you own property with a home on it, you owe property taxes.
Property taxes neither encourage nor discourage homeownership. The property is subject to the tax whether there is a home on it, or something else on it, or nothing at all on it. Your proposal: “Feel free to leave them on other types of property where they won’t discourage homeownership” WOULD have the effect of expressly encouraging homeownership as opposed to other uses for property and thus fails your own test.
By definition, all private property is owned by someone. If you are renting that property from that “someone” you’re paying property taxes in the sense that it is baked into the business model of the landlord.
If you are lucky enough to be renting long term (and cheaper), that landlord probably has his own tax rebate through prop 13. And therefore you are still paying his prop taxes.
If you think you’re avoiding property taxes by not being a homeowner, think again.
Although it seems obvious that eliminating the MID should decrease home prices, it might not turn out that way. Canada does not have a MID but RE prices in the Vancouver area are higher than they are in the bay area. The difference there is that mortgages are shorter term and people scramble to pay them off as soon as they are able.
Our decisions to get out of this mess are bad or really bad, we all are going to pay; we have time to make our choices, but the longer we wait, the more likely someone is going to make the choice for us. MID is a prudent choice to mitigae tax liability, but it will not last as the need for revenue increases. It will be phased in; it benefits the few at the expense of the many.
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” – Judge Learned Hand (1872-1961
It is interesting that no one in this thread has come up with an actual, rational, economic defense of the mortgage interest deduction. In other words no one is able to explain why it is good government policy. The best people can do is argue that homeowners would be hurt (because of property value drops etc.). But that is really just special interest posturing.
Basically, the MID makes no sense. It (and lots of other deductions) should be eliminated as part of a rational tax reform.
Condo conversion is getting easier and the cost will be passed through.
They can eliminate the MID when they eliminate all the other ridiculous deductions people are able to take (77K dancing horse Im looking at you).
The MID is one of the few large deductions the middle class are able to take. They normally do not have access to Swiss banks and are unable to take all of their income in dividends.
So let me get this straight. Property taxes have no effect on homeownership, do not encourage or discourage it one bit, yet other government taxes or tax breaks having to do with homeownership, such as the mortgage deduction, do have such an effect?
Indeed, it ain’t rocket science. Increase taxes on something, and demand for it will tend to go down. Yes, this works even for essentials like food and housing. This will result in a change of behavior. For example, people will get roommates and share houses, or they’ll move to mobile homes parked in the wilderness, or some other unforeseen methods of escaping those taxes, thus resulting in less demand for houses. But apparently there are those here that believe something like that could never happen, because, quote, “Property taxes neither encourage nor discourage homeownership”.
Since property taxes apparently have no effect at all on homeownership, I guess we can go ahead and raise them all we like, double or triple them. Because no matter what you do to them, they won’t discourage homeownership at all, right?
NoeNeighbor,
All communities have realized that homeowners are likely to be more stable citizen. if you make homeowners of your citizen, they would naturally have more incentives to make their lives better (they have more to lose in not pulling themselves up), their kids would have a positive model to follow. Everybody wins. Of course the subprime boondoggle proved you can’t force the market too far.
The Interest tax deduction plays in theory into this principle but I think it helps mostly people who would be homeowners anyway to get into a bigger or better home they would not otherwise choose. The end benefit is for people in the business of building and selling these homes.
In short, it’s a wide-reaching government subsidy to the Real Estate industry, just like road infrastructure is a subsidy to the car industry.
Before people brand me as a market absolutist, I think both are OK, because I think government must have a say into how they want the market to work. People want transportation, housing, they can vote for people who will provide the tools to make it happen faster (or better, more socially responsible) than what the market can deliver. Sometimes the market doesn’t function for the majority. Voters need to steer the beast. Markets will accommodate.
It’s how our society should function and Ayn Rand can kiss my backside.
Where government can overreach is how much it decides to put one layer of society against another. That’s a different issue.
But back to the deduction.
The problem today with sunsetting the deduction is that it would of course affect the industry, but mostly existing homeowners. Millions would find themselves with paper losses, sometimes underwater, stuck again in their homes like in 2007-2011. People who own today probably had the deduction baked in.
The government removing it would be throwing these people under the bus for an ever-unattainable balanced budget deity.
@Helmut – By fully subsidized I am referring to the fact that if someone can get 100% financing on a $1,100,000 property, they would be able to deduct the interest on the full loan amount (assuming they structure it as a $1 million purchase mortgage and $100,000 second). The full amount of their borrowing receives a government subsidy by way of the MID.
@Tipster – It is not the democratic cities that benefit but the suburbs of those cities. My hunch is that if you did a per capita analysis of the MID, people in Hillsborough or Marin are benefiting more then people in SF. Too many renters in the cities and the landlords get to deduct their interest as a business expense so don’t need the MID.
@Lol – “Millions would find themselves with paper losses, sometimes underwater, stuck again in their homes like in 2007-2011.” Millions of homeowners are still underwater in 2012. I expect more homeowners have resolved their underwater problem by foreclosure/short sale then have actually regained equity due to rising home prices.
Oh one quick comment, the title of this thread is a silly. If the MID is such a huge reason for people to buy a home then why does Canada have an almost identical % of homeowners to the US without having “The Last Vestige Of Why People Would Buy A Home?”
Rillion,
True, it’s still happening. But the current recovery is resolving the issue little by little.
But I do not agree that the best way out is by forcibly transforming homeowners into tenants through foreclosure or short sale. Enough blood has been shed already. The homeowner rate has fallen back to the pre-bubble times. All we need is a solid sustainable recovery. Not an another bubble, but something in line with historical standards.
About the editor’s title: There’s a question mark. It’s a way to trigger a healthy debate.
A lot of comments have suggested that this action (defeat of the platform amendment) means Republicans are opposed to the home mortgage interest deduction. I read this differently: that they rejected going on the record in support of it. So really it’s a neutral position.
Probably some of their supporters benefit greatly from this policy and that’s being weighed against the political benefits of sticking it to the expensive, and blue, metropolitan areas.
Very true, PHJ,
The GOP is going through a wild bi-polar phase and are afraid of anything binding one way or another. They’re officially anti-tax (new and old) but their platform does not (or cannot) reconcile that and the deficit reduction they so dearly claim they want. For instance their anti-new-tax Norquist “pledge” is showing some cracks with Jeb Bush explicitly saying he did not want to be bound by the voluntary commitment. He does comply to the pledge but wants to keep a range of movement just in case.
What this really shows is that the GOP doesn’t have a clear platform. They picked the very moderate Romney despite the fact that the only reason they currently have a pulse is the presence of the Tea Party and the Ron Paul movement.
I agree with Po Hill Jeff that they do not want to look like hypocrites. There are enough issues where Romney is historically aligned with the middle-of-the-road, like RomneyCare/ObamaCare and the Wall Street bailouts. I think Romney would act like W, not like what the TP wants him to act, but he’s trying really hard to hide it.
They aren’t neutral on it. They pulled support for it to be traded for something they want more: retaining as much of the Bush tax cuts as possible. Those expire at the end of the year and the republicans understand that they are going to have to give up something.
They have agreed to give up the mortgage interest deduction. It’s a done deal.
Well, lol, I agree with you that if Romney is elected he’ll govern like George W. Bush. But if that’s true, it undercuts the thesis of the rest of your comment.
Returning to the Bush approach means the GOP goes back to not giving a rip about deficit reduction OR about being seen as hypocrites. When they have the house of representatives and the presidency in their control, they forget all about the deficit, the debt ceiling will be raised again without fanfare, and we’ll go back to wholesale borrowing to fund the tax cuts (for “job creators”), health care funding for-the-currently-elderly and debt-financed wars of choice their supporters love so much, just like they did under W. The Tea Partiers will go back to playing adult LARP or re-enacting civil war battles.
And that can all hold true even if they actually take the mortgage interest deduction out of the tax code.
re tipster’s post – If the Reps (or anyone) were to come up with a proposal whereby the entirety of the Bush tax cuts could actually be paid for by the elimination of house-purchasing subsidies (including the property tax deduction as well), I’d happily support that.
I don’t think there’s anywhere near enough money there to bridge the gap, but it strikes me as pretty noncontroversial that incentivizing productive labor (which leads to taxable income) is a better thing for national policy in numerous ways than incentivizing home ownership. I’d be happy to see capital gains rates go up substantially to help pay for that too.
first of all, the likelihood is the MID will be reduced and not eliminated, probably to $500k or $250k. also any existing mortgages would probably have to be grandfathered anyway.