One of the most contentious aspects of congressional Republicans’ tax reform legislation is that it would reduce the amount of money new home buyers can deduct each year for interest paid on a mortgage. Democrats and some within the Republican Party, including numerous members of Congress who represent wealthy districts, say this change to the tax code will unjustly hurt families and raise taxes.
Nothing could be further from the truth. Reducing the home mortgage interest deduction would make the tax code fairer and help pare down the massive influence the housing and financial services industries have on tax policy.
Under current law, homeowners can deduct interest payments made on the first $1 million of a mortgage. The House’s Tax Cuts and Jobs Act would continue to allow new homeowners to deduct mortgage interest payments, but only on the first $500,000 of a mortgage. Everyone currently taking the deduction would be grandfathered in under the Republicans’ plan, but new homeowners with mortgages above $500,000 would pay more in taxes than if the current law were to stay in place.
The Republican Party generally opposes any tax increases, including those paid by wealthier Americans, so it’s understandable that some Republicans would see this provision of the tax reform plan as a contradiction of conservative values. What these objectors ignore, however, is that income tax rates for the vast majority of middle-income households will drop under the tax plan, which also doubles the standard deduction. These provisions will likely offset many of the losses experienced by middle-income families who take advantage of the deductions cut by the tax plan.
Further, many of the wealthier middle-class households with large mortgages also will benefit from the proposed cuts to business taxes and, more importantly, to the cuts to the corporate income rate, which would be capped at 20 percent, down from 35 percent. Democrats and pundits on the left have characterized these tax reductions as benefits that apply only to the rich, but one-third of workers are using 401(k) plans to save for their retirements and retirement funds are sure to expand if corporations receive a tax cut. Fidelity reports that the average 401(k) fund has increased by $4,300 over the past year alone (from $88,200 to $92,500), thanks to the large increases in the stock market enjoyed since President Trump was elected.
A large cut in the corporate tax rate is also likely to deter many businesses from moving overseas in pursuit of more favorable tax environments, and corporations will have tens of billions of additional dollars available for expansion and investments, which means there will be more jobs and higher wages for workers.
Critics of eliminating the home mortgage deduction also argue against the tax plan because, in some urban and suburban areas of the United States, a $600,000 mortgage is relatively common for middle-class households. This is true, especially in many parts of the New York and Washington metropolitan areas. What these critics won’t tell you is that the home mortgage interest deduction is fundamentally unfair and forces other taxpayers to subsidize some high-priced homes.
For instance, a working family living on Long Island with an $800,000 mortgage will pay less in taxes than a family in Upstate New York living in an identical home and earning an identical income—all because the Long Island family’s mortgage is larger, so it is able to deduct more income on its federal taxes. Why should a family in Upstate New York be forced to pay more for living in an area where home values aren’t as high? The truth is that the mortgage interest deduction has effectively rewarded urban and suburban homeowners at the expense of rural families.
Some might argue that because the Long Island family’s mortgage is higher, it needs greater tax relief, but this assertion fails to take into account that a home is often a household’s most important investment. If the Long Island household pays off its mortgage and sells the higher-priced home, it receives significantly more than what the family in Upstate New York would earn from the sale of its home, even though the two houses in our hypothetical are exactly the same.
When the Long Island family sells its home, does the Upstate New York household receive extra cash to compensate it for subsidizing the Long Island family’s income for years and years? Of course not.
In addition to creating unfairness between homeowners, the home mortgage interest deduction creates an incredible amount of unfairness between those families that buy homes and those who rent. Under the current tax code, two neighboring households with identical incomes and identical homes pay very different effective tax rates if one of the households rents and the other has a mortgage. Why should renters, who on average have lower incomes than families that have purchased homes, be forced to subsidize homeowners, especially considering homeowners have the added benefit of being able to sell their house in the future?
Perhaps the biggest supporter of the home mortgage interest deduction is the mortgage lending and housing industries. They believe that if the deduction is scaled back, people are less likely to purchase homes that cost more than $500,000. This assumption is probably false, since, as I mentioned previously, it fails to take into account the other tax benefits of the legislation many middle-income and upper-income households will receive.
But even if it were true, this is nothing more than an argument in favor of crony capitalism. All industries should be forced to compete in the marketplace with as few regulations and taxes as possible. By using revenues from taxpayers and businesses to subsidize the housing and lending industries, Congress is sanctioning a practice conservatives have long denounced as manipulative and inequitable.
The home mortgage interest deduction makes tax fairness impossible and should be completely repealed in the future. By reducing the deduction in the Republicans’ tax bill, Congress would move one step closer to ending this immoral provision. No true friend of the free market would argue otherwise.
Justin Haskins (@JustinTHaskins) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is an executive editor at The Heartland Institute.
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