Congressional Research Service Assesses Mortgage Interest Deduction Reform
Resources
Memo to Members: Vol 10, No. 41, October 21, 2005
A Congressional Research Service report released in August and recently made available online provides an analysis of the deduction for home mortgage interest and the potential effects of tax reform policies on the deduction and its intentions. This report provides additional weight to the argument that advocates have been making for years: that federal housing tax policies are poorly targeted, benefiting primarily the well off and inefficient in providing housing to those who need it most. The report also provides background on the academic literature on this subject. Most importantly, it provides a clear discussion of the potential implications of reform.
As it exists, the deduction benefits 37 million taxpayers and is one of the largest sources of federal tax revenue loss – an estimated $72 billion annually. While the deduction for home mortgage interest is intended to promote homeownership, the report found that the deduction subsidizes existing homeowners instead of new homeowners and that high-income households claim the majority of the deductions and receive the majority of tax savings through those claims. Homeowners can claim the deduction for up to two residences, and households with incomes of $50,000 or more made 67% of the claims for the deduction for mortgage interest and received 76% of the total value of the deductions. Additionally, the report noted that down payment assistance grants would provide a more efficient increase in homeownership rates, especially among lower-income households.
The report speculates that the mortgage interest deduction could be modified so as to allow the deduction for only one residence, reduce the allowable principal debt (currently $1 million), or permit more low-income households to claim the mortgage interest deduction. These changes would reduce the magnitude of the tax revenue loss and could increase homeownership rates among low-income households. The report also concludes that, should the deduction be eliminated without other tax reform, some households that were considering homeownership would instead continue to rent.
The report, “Fundamental Tax Reform: Options for the Mortgage Interest Deduction” is available at: http://digital.library.unt.edu/govdocs/crs/data/2005/upl-meta-crs-7300/RL33025_2005Aug08.pdf
