Think Tank Recommends Reducing Mortgage Interest Deduction

The Brookings Institution has published two articles on tax reform, one of which should be of particular interest to MND readers.  The two briefs are part of the progressive think tank's Remaking Federalism/Renewing the Economy series.  One calls on Congress to make permanent and expand the critical research and experimentation (R&E) tax credit; the second recommends curtailing "the massive mortgage interest deduction."

The time has come, Brookings says, to reform the mortgage interest deduction (MID) which "continues to grow exponentially, subsidizes excessive housing consumption, and diverts substantial resources from more productive pursuits."

The article's author Bruce Katz says that reforming MID "offers an opportunity for the federal government to realize hundreds of billions of dollars in savings over a 10-year period to contribute toward deficit reduction as well as to invest a portion of the savings in policies and programs that are likely to spur more productive and innovative economic growth." 

Katz does not suggest eliminating the deduction entirely; many economists have called it the single largest deduction available to much of the middle class, but rather reviews several suggestions to rein it in.  The Obama administration has proposed in each of its past four fiscal year budgets a cap of 28 percent on the income tax rate at which taxpayers can use any itemized deductions including the MID. This would only affect married taxpayers filing jointly with adjusted gross income (AIG) over $250,000 and single taxpayers with an AGI over $200,000.

Two versions of a second common proposal to change the MID deduction to either a refundable or non-refundable tax credit while capping eligible income have been recently suggested by tax forces established to look at debt reduction.  The so-called Domenici-Rivlin group, proposed shifting the MID to a 15 percent refundable tax credit for all taxpayers, lowering the mortgage limit from $1.1 million to $500,000, and eliminating the provision that allows taxpayers to deduct mortgage interest for second homes and home equity loans.  A second version proposed by Simpson-Bowles was similar but made the tax credit a non-refundable 12 percent.

A third proposal made recently (referenced by presidential candidate Mitt Romney and now advocated by several Republican members of the House) has been to put an overall cap on itemized deductions including the MID and the deduction for charitable contributions.  Various versions would put the cap between $25,000 and $50,000.

Any of these proposals, Katz says would raise billions in tax revenue for deficit reduction and investment and create a fairer balance in benefits among lower, middle, and upper income homeowners.