Just days after winning a major legislative victory in the stimulus package, the housing industry lobby machine is cranking up again — this time to oppose an element of President Obama’s proposed 2010 budget, which would curtail the mortgage interest deductibility for tax filers in high brackets.
The proposal would let tax filers in the 33 and 35 percent brackets deduct their mortgage interest only at the 28 percent level, cutting off some tax savings these high-income filers currently enjoy. (For an explanation and an example, see this Wall Street Journal article.)
This is an odd wrinkle. The mortgage interest deduction is now available on mortgages of $1 million or less. If the White House wanted to generate more revenue, why not lower the cap?
One potential explanation is that property values vary greatly by region: A $1 million home is positively rich in rural areas, but much less so in cities like New York and San Francisco. By lowering the cap, the feds risk exempting someone in a mansion in Plainfield but ensnaring someone in a starter home in Marin County. While incomes vary by region, the variation is probably less than for property prices.
The National Association of Home Builders and the National Association of Realtors have both voiced full-throated opposition to this aspect of the 2010 proposed budget. Mortgage interest deductibility has long been considered a sacred cow in politics and these lobbies’ influence will be tested, but I expect this to be changed before a final 2010 budget is passed. (And if you’re curious about the arguments against the mortgage interest deduction, check out this New York Times Magazine article from 2006.)
Overall this is a positive development, if only a tiny step in the right direction.
With the mortgage interest deduction, it essentially subsidizs home ownership financing, which in turn drove up the price of home ownership. It encouraged people to take on excessive debt.
Remove the mortgage interest deduction and the price of housing falls to account for the removal of a subsidy and people don’t have to borrow as much to own the same residence.
Perhaps the government’s original intent of this was to make housing more affordable to more people, however over the long run this wound up having the opposite effect. Direct subsidies only increase the equilibrium price of a good over the long run.
And then maybe Bob can afford to buy?
A curious notion is beginning to take hold out there – that all money belongs to the government and whatever portion of it some are allowed to keep is a “subsidy.” In any event, this isn’t a direct subsidy and may simply affect capital allocation decisions rather than price levels.
We can argue the economic effect of the mortgage interest deduction forever. Assuming, arguendo, that it has the effet of propping up prices, tens of millions of people have planned their lives around that assumption., and those plans should not be lightly trifled with.
A finance professor told me some years ago when they did away with the interest deduction on other forms of debt and were considering targeting homeowners Congress learned pretty quickly not to touch that ‘sacred cow’. I think thats why they’re only starting at the higher brackets and only reducing the deduction instead of capping it. There are significantly fewer people at those brackets and thus less likely to cause a populist backlash.
In any effect if the government is interested in stabilizing the housing market in the short term this certainly won’t help. But its not out of character for the government either: jumbo mortgages (the ones likely most hurt by this new law) have the highest default rates by far and the government doesn’t seem interested in helping households with a mortgage above the conforming limit.
Given only higher brackets are affected and only marginally, I don’t think this policy will have much of an affect as many people in the higher brackets are likely hit by AMT anyway. As for your hunch regarding income, thats exactly the way DC sees it these days: your money is Washington’s money until they decide to give some back to you.
Thank you Bob Obama. ‘Only higher brackets are affected…only marginally”. Give me some of what you are smoking. This is just a start of the redistribution of wealth. Lost in the euphoria of the media not reporting facts, is that anyone with a calculator can look at the bullsh!t plan and see that Obama, Pelosi, and Reid can’t possibly pay for all of this with high-income tax bracket funding only; this is Obama’s ‘trickle down policy’. If only we all had gay lovers at Fannie Mae & Freddie Mac like Barnie Franks, we could all profit.