If there were any taxpayers out there waiting anxiously to see the basic elements of President Trump’s tax plan (released today), they were probably most concerned about the future of the mortgage interest deduction.
Because of this much-overrated provision, widely used by homeowners, you probably paid more when you bought your home and didn’t realize it. But it also means you are getting some (or maybe all) of that extra money back on your tax bill, because you can deduct all of the interest you pay on your home mortgage. And for the first few years of a 30-year mortgage, nearly all of your payment is interest (this is how amortization works), so that means you get to deduct almost your entire monthly housing cost.
Trump’s plan doesn’t get rid of the deduction — this and the deduction for charitable giving are the only ones left intact — but it makes you far less likely to use it. The reason is that you don’t take the mortgage deduction if you take the standard deduction, and Trump’s plan nearly doubles the standard deduction for everyone. In short, most people who are not very wealthy or house-wealthy will be better off.
By default, this makes the tax code fairer for renters. Now they get to (air quotes here) take the mortage deduction without even having a mortgage. Homeowners can still take it, or not take it, whichever is more advantageous.
This is probably the only politically palatable way of (more air quotes) getting rid of the mortgage deduction, and so it’s probably a good thing. This makes the tax code fairer for the vast majority of Americans who take the standard deduction, not giving most homeowners a special break that has distorted the economy by helping fuel the real estate craze.
Another tax simplification that is even better is the proposed elimination of the deduction for state and local taxes (in exchange, of course, for lower rates for everyone). In high-tax states, they will not be happy about that one. This deduction has essentially put the federal taxpayer in the position of subsidizing state governments like those of California, New York and New Jersey for decades. It has allowed leaders in those states and their cities and counties to rationalize absurdly high local and state taxes on the grounds that their residents get a corresponding break on their federal taxes.
The only problem? You’re probably going to need at least some members of Congress from those high-tax states to vote for your plan, and it’s going to be a hard sell for them.
