Although some folks on the right are griping about it, House Ways and Means Chairman Dave Camp was right to include reform of the mortgage interest deduction in his big tax reform plan. From the Camp plan:
Under the provision, a taxpayer may continue to claim an itemized deduction for interest on acquisition indebtedness, but the $1 million limitation would be reduced to $500,000 in four annual increments, so that the limitation would be $875,000 for debt incurred in 2015, $750,000 for debt incurred in 2016, $625,000 for debt incurred in 2017, and $500,000 for debt incurred thereafter.
The MID is a $70-billion-a-year, market distorting subsidy for the purchase of expensive homes by high-income taxpayers. It does little to promote homeownership by Americans of more modest means. There is no sound economic reason to use the tax code to artificially advantage the higher-end real estate sector over other sectors of the economy.
What’s more, the MID is a key part of what Northwestern University’s Monica Prasad calls “mortgage Keynesiamism,” an initially Democratic, New Deal effort to funnel the welfare state through housing and consumer credit rather than more directly as in Europe. Except mortgage Keynesian really doesn’t really do much to help the poor and creates economic risk, as we saw during the Financial Crisis.
But won’t the Camp plan kill home prices? Unlikely. A 2008 study of the price reaction to eliminating completely the subsidy estimated only a 4.2% decline in home equity. Now this isn’t to say that Camp’s approach is ideal. AEI’s Alan Viard recommends — accepting the political reality of some housing tax preference — converting the MID into a 15% refundable tax credit available to all homeowners.This approach, Viard writes, “substantially limits the tax preference for expensive homes while increasing homeownership assistance for taxpayers who are less well off.”