Pethokoukis

Dave Camp’s mortgage interest reform is maybe the best of his tax reform plan

Image Credit: Shutterstock

Image Credit: Shutterstock

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.”

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

17 thoughts on “Dave Camp’s mortgage interest reform is maybe the best of his tax reform plan

  1. The Camp proposal is stupid; and discriminatory towards locations where prices are higher. This is fine for Michigan where $500K buys a mansion. But what of San Francisco where it won’t get you the smallest house?
    Again, a Republican looking to take money from rich desirable Democratic regions to subsidize their constituencies.
    It’s okay to increase taxes if that mostly affects Democratic areas.

    • Maybe the reason your housing prices are so high in rich desirable Democratic regions is because of your stupid housing and real estate policies. In the meantime, the lower cost, more sane housing and real estate policies in other parts of the country are subsidizing your policies. Is that fair?

    • Again, a Republican looking to take money from rich desirable Democratic regions to subsidize their constituencies“…

      ROFLMAO!

      Apparently it doesn’t bother you in the least that socialist legislation pushed by the Dems have been stealing wealth from the private sector since at least FDR, right?

      Camp’s legislation is going nowhere

  2. Eliminating the HMD is a tax increase for the middle class that will have virtually no effect on the wealthy. Eliminating it will simply bolster the idea that conservatives support only the rich.

    The wealthy have a variety of equity assets, many of which are taxed at low rates. The GOP plan would keep those low rates.

    BUT virtually the ONLY asset the middle class has is our homes. A tax increase on this would leave almost all assets of the wealthy untouched, but force middle class wage earners to pay huge taxes on their ONLY asset.

    The middle class has no power in America, so the 1% will do pretty much what they want on this issue. Hopefully we middle class taxpayers will have the foresight to see this as another giveaway to the wealthy by conservative politicians.

  3. Thanks for engaging in the conversation of deductions.

    Lets end all deductions and end taxation of productivity by adopting the Fairtax. The mechanism to collect it is already in place, it ends K St. influence, ends the Half-trillion dollar compliance industry, ends foreign dumping of goods and that is just the beginning.

  4. Excellent blogging.

    Canada has no home mortgage interest tax deduction, so life does go on.

    Bud Mor raises an interesting point; the bill would hit the coasts and no one in the middle.

    My solution to that is that every state get back from DC the rough equivalent of what it sends to DC; no more chronic subsidies for the rural “pink” states.

  5. Camp’s proposal also eliminates state and local tax deduction. In his view such a deduction is a direct transfer of wealth from high tax states to low tax states. Is he willing to make certain that federal expenditures are much more closely mapped to the individual state contributions? Let’s make sure that those transfers also include federal expenditures going to where the taxes are collected from.

    Just another case of one group of special interest groups getting more favorable treatment than another.

  6. I haven’t read Prasad’s book, but her argument that consumer credit is social engineering tortures history as I know it. Mortgage interest was deductible from the start of the income tax in 1913 because ALL interest expense was deductible, and almost all interest expense was business related. Very few homeowners had mortgages 100 years ago, so it’s kinda hard to describe MID as a specific government policy.

    In fact, most consumer credit happened over the dead bodies of bankers, their regulators and patrons in state houses and Congress. Edward Filene started the credit union movement to expand his department store customer base. The building and loan movement addressed banks’ reluctance to finance homes. Wm Durant founded General Motors Acceptance Corp. in 1919 to finance car sales, previously considered unthinkably risky. The creation of the FHA and mortgage insurance in 1934 was a specific response to frozen credit markets, as in 2009. But again, no one then could imagine mortgage interest deduction as the middle-class perk it has become.

    Or the kind of distortion it fostered in the late, great housing boom. Many homeowners would have passed on cash-out refis without tax subsidies.

    Ax it completely, in stages obviously.

    • Actually, a more direct culprit for the latest housing boom is are the mortgage derivatives.

      These were invented and managed by the wealthy.

      • MBS syndicators funded the crazy loans — subprime, low doc. no doc, negative amortization. But once housing prices started falling, the bulk of the underwater mortgages were plain ole 80 percent ltv, and most of them refi rather than purchase. Kinda adds insult to injury for taxpayers to bail out Fannie and Freddie after they grew fat, dumb and happy on taxpayer subsidies of mortgage interest. Happily, F and F are rapidly making good on the public’s $180B in aid, and will soon become a profit center.

        • Hi Todd, the top half of your reply is correct. But, you did not mention that the MBS securities were bulked and sold as derivatives. They were falsely graded as A type when most were actually sub prime loans. They were resold these to unknowing investors. Many were from 401k’s and other mutual funds – so the average person got nailed.
          It is the wealthy firms and their wealthy investors who made out like badits – oh, wait, they were the bandits!

          I agree F and F shouldn’t have been bailed out – so many others should hot have been bailed out either (especially the likes of AIG or Goldman etc).

          However, I believe that you are incorrect that the bulk of defaulted loans were 80% ltv. As a Realtor who worked on many foreclosed homes and saw many families facing foreclosure, the bulk of these loans were subprime – not that it makes things better.

    • Hi Todd, I agree with most of your reply here, but I believe that the not passing on cash-out refi’s was more of a culture issue than interest deductions. The credit card craze of the 90′s pushed a reward now culture that became addictive. People saw their home as a credit card – not even remembering the interest deduction.

  7. In hindsight, we should have never implemented interest deductions on home mortgages and we should have never implemented a tax break on sales held over 2 years.

    This kind of social engineering has led to a ballooning of home prices across the board making it harder to for first time buyers by inflating home prices by at least the amount of the tax advantage.

    As someone pointed out, these kinds of home ownership breaks do not occur in Canada and I am unaware of such breaks elsewhere.

    Well now we are in it – a big tax balloon. How to exit, if ever?

    • If we eliminate the HMD, then let’s tax all assets, all equities, all capital gains as normal income. The ONLY asset the middle class has are its homes. I’m not sure why we preserve the carried interest deduction while folks say to eliminate the HMD. Perhaps we can cap it, but eliminating it is a direct attack on middle class home owners and subsidizes other forms of assets.

    • You are right about the tax break on sales for residences held over 2 years. It causes too much turnover.

      (However, a tax break for families who live in a home for over 10 years is not a bad idea – particularly for the retiring. Note that the home is the only investment for most of the middle class.)

  8. The mortgage interest deduction is NOT a benefit for the middle class. It is an effect a subsidy that artificially increases home prices. Ever buy a home, hem and haw about a particular price point, and have a realtor tell you: Don’t forget about the mortgage interest deduction? I have. the mortgage interest deduction is somehow sold to the middle class as a way to make homes more affordable, but then as soon as someone talks about reducing it, the crying begins about how home values will drop by X% for current homeowners. Yet wouldn’t that make home prices more “affordable?”

    The proposal to increase the standard deduction for couples/families to $22K would negate the mortgage interest deduction for the vast majority of homeowners in the first place.

    This article is correct in that the deduction benefits only the richest, who don’t really need this anyway. If you are concerned about being able to buy a house on the coast, where it is $500,000 to buy a tiny place, then you might find that ultimately (according to some who are AGAINST removing the deduction) the prices are slightly less, because no one will be using the expected mortgage interest deduction as a factor in their bid for a a home.

    • Hi Rusty, do you remember the recent recession when housing prices dropped dramatically, thus making them more “affordable”? I’m sure you know why people didn’t rush out in droves to buy a house (except savy investors who KNEW the prices would correct eventually). Yes, its because the price of real estate is directly tied to our economy. If prices for real estate fall, it will cause a negative effect to the overall economy.

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