Mortgage Interest Deduction Under Threat | FTI Consulting

Could the Mortgage Interest Deduction be under Threat?


Republican Leaders Target Mortgage Interest Deduction

Economic Consulting

January 12, 2017

Mortgage

The mortgage interest deduction (MID), a longstanding part of U.S. tax law, allows homeowners to deduct mortgage interest from their federal income taxes. For many homeowners in the middle-income range, the MID typically is their largest tax deduction.

Congressman Kevin Brady (R-TX, Chairman of House Ways & Means) has proposed to double the available standard deduction, which could reduce the incentive to itemize deductions and for taxpayers to claim the MID. Having the standard deduction essentially overtake the MID would remove part of the encouragement towards homeownership embedded in the tax code. This, in turn, would lead to a decline in the perceived status of homeownership, affecting housing demand and prices in the real estate market.

This article reviews the pros and cons of the MID as a policy instrument, some prior suggestions for its reform, and the state of the literature on its broader economic impact. We find that the macroeconomic impacts of tax reform proposals either directly or indirectly affecting the MID have been insufficiently studied. Further work on the matter is needed to understand:

  • The effect on household budgets and short- and long-term consumption patterns
  • The effect on housing prices, property tax revenues, and housing demand
  • Long-term changes to the wealth of American households
  • Effects on the those building homes (e.g., construction) and mediating transactions (e.g., real estate)
  • Effects on the homeownership rate
  • Short- and long-term social benefits of housing
  • The cost of the tax expenditure for the MID on the federal budget

Such research would reveal the impact of the MID on the U.S. economy in terms of jobs, GDP, income, and wealth in the long-term and the impact of any changes made to it.


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