NAHB Rebuts Arguments for Repeal of MID

The cost, efficacy and fairness of the mortgage interest deduction (MID) are part of nearly every discussion in Washington about the tax code, housing policy, or the budget and there appear to be about six sides to every debate. Economists from the National Association of Home Builders (NAHB) have weighed in with responses to what they say are 10 "claims" about MID.

Claim #1: Benefits of the MID accrue mostly to the wealthy. NAHB says 86 percent of households benefiting from MID have incomes under $200,000. That figure often includes two household incomes.

Claim #2: Eliminating MID would not damage the economy or individual households. "Almost all studies" find it would reduce demand for housing which would lower home values for existing home owners. This would reduce household wealth, put mortgages under water thus increasing defaults and foreclosures, and reduce property tax revenues and thus local services. Even a 1 percent decline in home prices would cost American households $185 billion in net worth.

Claim #3: Only a small percentage of home owners claim the MID. Seventy percent of home owners with a mortgage claim the MID in a given year, and almost all home owners benefit from the deduction at some point during their homeownership life cycle. Many mortgaged households do not take the deduction in the later years of a mortgage when interest payments are small but probably had done so in earlier years.

Claim #4: Repealing the deduction would make the tax code more progressive. Repealing the MID would result in larger tax hikes - as a share of household income - for the middle class. For example, for households with less than $200,000 in adjusted gross income, the typical mortgage interest deduction is worth 1.76 percent of that family's AGI. For taxpayers reporting more than $200,000 in income, the benefit falls to 1.5 percent of AGI.

Claim #5: The mortgage interest deduction incentivizes buyers to purchase a larger home. While MID may have some relation to home size, evidence ties the choice of housing size more directly to family size and underlying housing demand.

Claim #6: Renters do not support the mortgage interest deduction. Public opinion polling has generally found the MID to be popular with renters, most of whom hope to become home owners.

Claim #7: Because mortgages on second homes also qualify for the MID, taxpayers are subsidizing vacation homes for the wealthy. The second home deduction also applies to families who own two homes in a single year as they move from one to another or build a new residence. Where second homes are seasonal the MID helps areas where the economy relies on recreation/tourism. Also, the Consumer Expenditure Survey found the average income of a household with a mortgage on a second home is $71,344.

Claim #8: While the MID supports homeownership, federal policy neglects renters. In dollar terms Housing policy support is roughly proportional to the renter/owner ratio in the total population.

Claim #9: Since not all home owners itemize, a credit would be better for the market. This would depend on how the credit was structured, that is its size and what it includes. Some current proposals would increase the tax burden on homeowners.

Claim #10: There is too much policy support for housing. Discussions of tax policy focus on the federal level and often ignore the tax burden placed on homeowners on the state and local levels.

NAHB said its information refuting the ten claims is derived from the Internal Revenue Services, the Census Bureau, and estimates from other sources.