While We’re Thanksgiving Napping, Uncle Sam is Readying to Carve Up The Mortgage Interest Deduction

This article was originally published on the Seattle Homes Blog:

Thanksgiving mortgage interest deductionThanksgiving is a time for Americans to relax with family, eat a bit too much, and take a tryptophan-induced nap. We’d all be happy to ignore politics for a while with the election finally over, but politicians are sharpening their knives over one of American taxpayers’ most-cherished financial incentives. While more than 90 percent of Americans support the mortgage interest deduction, there is broad agreement that it will be targeted in Washington, D.C. in the coming year in an effort to reduce budget deficits.

Changing Course(s)

Every Thanksgiving you can’t wait for your mother’s homemade turkey stuffing. It’s practically the main reason you’re coming to dinner. So, when you arrive this year and it’s a Peking duck with an orange sauce, you may feel like you’ve been had.

This is how millions of homeowners will be treated if we change the rules of the mortgage interest deduction. They created a budget to buy a home. They worked with their mortgage adviser and tax planner to decide what they could afford. They bought a house, knowing how much they could deduct in taxes every year and set their budget accordingly. Reduce the MID, and we immediately increase their housing payment. Through no fault of their own, families will struggle with their budgets because the tax rules they had planned on were pulled out from under them.

Cook it Fast and Hot or Slow and Low?

Reducing the MID is one of those shortcuts that seems like a quick fix. Raise homeowners’ tax bills, and reap the immediate budget rewards. In reality, it’s like baking a turkey at twice the temperature to save half the time. It will certainly get done faster, but the blackened bird is going to shorten next year’s guest list significantly. When tax bills go up quickly, short-term revenue increases, but take home pay and disposable income for home buyers go down. Without the deduction, homes become less affordable, and stagnating home sales are never good for long-term tax revenue or the economy.

The mortgage interest deduction, on the other hand, has a long-term, slow growth effect on the economy. It makes purchasing a home more affordable for first time buyers, but it also has a multiplicative effect. Those buyers start a slow heating of the market as they purchase homes and allow the sellers to become move-up buyers. More buyers create more competition and the ensuing price appreciation creates fewer underwater homeowners, fewer foreclosures, and healthier neighborhoods.

When we encourage home sales through the mortgage interest deduction, there are far more sources of long-term revenue. More real estate agents, appraisers, lenders, inspectors, builders, tradesmen, title officers, sign companies, marketing companies, office supply companies, and hardware stores experience increased income. They all pay more income tax, resulting in more tax revenue–but their take home pay is still increasing. Consumption has always been the engine of our economic growth, and people with more income will inevitably spend more.

Who’s Coming to Dinner?

Much of the debate over the mortgage interest deduction centers on who “deserves” to get the deduction. Some proposals will contend that homeowners with certain incomes shouldn’t be included, or that homeowners with higher-priced homes and higher-balance mortgages are not worthy of the deduction (keep in mind that 2/3 of homeowners claiming the deduction have less than $100,000 in total household income).

These exclusions really miss the point. The mortgage interest deduction exists to encourage homeownership and keep the market healthy as a whole. A bottom-heavy or top-heavy market isn’t healthy. Strong sales at all price levels are required to increase overall prices and reduce distressed properties. Any reductions in this incentive will have a negative impact on the market as a whole.

Time To Wake Up and Go Home, Folks.

Continually standing up in defense of the mortgage interest deduction can become tiresome, much like your holiday house guests. The first time you hear a story it can be intriguing and energetic. By the third time, it just feels like an effort to keep your eyes open. We don’t want to talk politics over the holidays. Falling asleep on the mortgage interest deduction would be easy.

Right now, though, the stakes for this much needed homeowner benefit are high. Ever-increasing voices in Washington, D.C. are lining up to take a piece of the pie. American homeowners (who already pay 80 to 90 percent of the nation’s income tax bills) shouldn’t be singled out for tax increases simply because they bought a home.

Reducing the MID would be counterproductive for the nation’s economy as a whole. Real estate accounts for nearly 1/5 of the nation’s GDP. It is in our country’s best interest long-term to encourage homeownership, healthy real estate markets, and economic growth through incentives like the mortgage interest deduction.

Sleep off that stuffing, get your Black Friday shopping done, and then it’s time to get back to work protecting the American dream.