Just Taxes Blog by ITEP

The Mortgage Interest Deduction Is a House of Cards

The Mortgage Interest Deduction Is a House of Cards

August 12, 2019

Jessica Schieder
Jessica Schieder
Federal Tax Policy Fellow

During the debate leading up to the passage of the 2017 Trump-GOP tax law, some voiced concerns that its provisions limiting the reach and generosity of the mortgage interest deduction could cool the housing market. But new evidence confirming that these worries were overblown should embolden policymakers to permanently eliminate the deduction.

A recent analysis by The New York Times found no meaningful divergence in home prices when comparing areas where larger shares of middle-class taxpayers previously claimed the mortgage interest deduction to areas where homeowners used the deduction less frequently.

Even before the Tax Cuts and Jobs Act (TCJA), most families did not claim the home mortgage interest deduction because they did not own their homes or because they claimed the standard deduction. After TCJA, the number benefiting fell precipitously. An ITEP report published last year estimated that the new law reduced the share of taxpayers claiming the mortgage interest deduction from 23 percent to 11 percent.

The change that TCJA made directly to the deduction is relatively minor, shrinking the maximum eligible mortgage amount from $1 million to $750,000. Indirectly, however, the law shrank the deduction by nearly doubling the standard deduction and placing a cap on the amount of property taxes and other state and local taxes (SALT) a taxpayer can deduct on a federal income tax return. The standard deduction rose to $12,000 for single filers and $24,000 for married and joint filers, while capping SALT deductions at $10,000. The result is a big jump in the number of taxpayers for whom the standard deduction is more generous than the sum of itemized deductions they can claim. So now many with home mortgages get a better deal if they claim the standard deduction.

The remaining recipients of the mortgage interest deduction are an even smaller and higher-income slice of taxpayers. The ITEP report estimates that among the richest 1 percent, the share claiming the deduction fell from 84 percent to 80 percent, but for other groups, it fell much more dramatically. For example, among the middle 20 percent of taxpayers, the share claiming the deduction to fall from 16 percent to 5 percent. Today, taxpayers in the bottom 60 percent account for just 13 percent of those claiming the deduction, down from 18 percent.

Given this deduction primarily benefits the highest-income households, its continued existence is hard to justify. Even when the credit was available to a larger swath of families, it was ineffective at promoting homeownership. A recent Congressional Research Service report makes clear why there’s little reason to believe the credit was effective even before 2017, “[T]he deduction was not well-targeted to the largest barriers to homeownership—the down payment required by banks and closing costs.” It’s remarkable that the authors of the TCJA found a way to take a deduction that was already ineffective at promoting homeownership and make it even less effective at achieving that goal.

At the same time that tax credits benefiting low- and moderate-income families are often held to high standards—refundable credits are regularly scrutinized and the value of those credits to the economy is questioned—lawmakers have chosen to retain the mortgage interest deduction almost without question. In light of these findings, policymakers should permanently eliminate the remaining mortgage interest deduction and critically examine similar tax breaks that reward the highest-income households. The case for doing so has never been stronger.