Mortgage Interest Deduction

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The Constitution was amended in 1913 to include the sixteenth amendment, enabling Congress to levy a tax on incomes from any source. Certain tax rules were first put in place that enabled the deduction of expenses, namely interest on debt payments. Herein lies the birth of the present day mortgage interest deduction to the IRS code that has survived for nearly a century. In the beginning, federal income taxes only applied to the top one percent, but this has been broadened to encompass more Americans. 

 
The American dream is built on the notion of a home ownership society. The mortgage interest deduction has certainly helped bring the cost of home ownership down, enabling more of society to participate in the dream. It does this by giving a homeowner the ability to deduct the interest expense on their home from their income to arrive at a lower tax liability. This translates into an average tax savings of over $3,000 dollars a year. However, the tax savings to the homeowner is also seen as an expense or cost to the federal government. With Washington currently borrowing thirty six cents of every dollar it spends, there has been an increased focus on cost saving measures. That has included the elimination of the mortgage interest deduction, which equates to roughly $100 billion dollars a year.
 
The critics of the mortgage interest deduction see it as being a perk for the rich and encourage Congress to eliminate it. However, it should be noted that the one million dollar upper limit on mortgage deductions limits its impact on the rich and ensures that it is not abused. With 75 million homeowners in America, more than half of them take the mortgage interest deduction demonstrating that it benefits more than simply the rich. Currently homeowners pay between 80 to 90 percent of all federal income taxes, but with the elimination of the deduction that rate shoots up to nearly 95 percent. 
 
Eliminating the mortgage interest deduction would result in some quick cash for Washington but it would have negative consequences.  It is estimated that home values in America would decrease by 15 percent, as it would become more expensive to own a home. After the recent real estate downturn many homes became underwater, where the home’s value is worth less than the loan on it. Now imagine homes across America decreasing an additional 15 percent. How many more underwater homes would that create? The consequence of decreased home values will hit each community as many local governments are funded by local property taxes. Many local budgets have already been cut to the bone with the recent real estate downturn, but how would they cut an additional 15 percent of their budget?
 
Congress is currently looking at extending the payroll tax cut for an additional ten months as it would put an additional $1,000 a year in a worker’s hand that otherwise would be put into entitlement trust funds. Rhetoric flies as to how much that money means to a worker and questionnaires of what would you do with an extra $40/week are circulating on the Internet. Many homeowners would look at the elimination of the mortgage interest deduction as a tax increase of over $3,000 a year and would be hit hard as they would need to find $120/week elsewhere to cut back on. To cut over $3,000 is no easy feat when you consider that the average yearly grocery bill for two people is $2,694, the average family’s annual entertainment expense is $2,698, and the average family’s car payment is $3,269. The other option would be to sell one’s home, which would push more and more Americans into rentership and continue the recent decline in America’s homeownership rate.  
 
Mortgage interest deduction has been part of the tax system from the beginning and a very popular component of it. The effect of eliminating it in one fell swoop would have across the board consequences from local economies to the national economy. The damage it would cause the already fragile real estate industry could easily push America into a recession. 
 
While the idea of eliminating the mortgage interest deduction is being thrown around for cost savings, the political and economic implications of doing so should greatly outweigh the savings. While the deduction is approaching its 100th birthday, its time may soon be coming as Congress wrestles with record deficits. 
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