Moneybox

Republicans Gutted the Mortgage Interest Deduction. Democrats Should Finish It Off.

A home with a "SOLD" sign out front.
Still going like hotcakes.
Steve Diapaola/Reuters

One of the most remarkable things about the tax bill Republicans passed last year was how it took a rotary saw to the mortgage interest deduction. The benefit for homeowners was once considered a politically untouchable upper-middle-class entitlement, but the GOP aggressively curtailed it in order to pay for cuts elsewhere in the tax code.

This week, Congress’s Joint Committee on Taxation offered new projections showing just how radical this move was. The report predicts that just 13.8 million households will subtract mortgage interest from their 2018 returns, down from 32.3 million in 2017. The total cost of the deduction will fall from $59.9 billion to $25 billion—a drop of about 58 percent.*

At the same time, the deduction’s benefits will become more skewed toward the wealthy. Come next tax season, about 24 percent of the deduction’s benefits will go to households earning more than $500,000, up from about 12.4 percent this year. The MID has long been criticized for being a large giveaway to well-off blue staters with expensive homes. Going forward, it will be a smaller giveaway but an even more regressive one.

How the mortgage interest deduction is distributed
Jordan Weissmann/Slate

Why did the GOP’s reforms work out that way? In order to simplify and cut taxes for many middle-income households, lawmakers doubled the standard deduction that most Americans take on their returns. As a result, many fewer taxpayers will bother to itemize any deductions, including the one for mortgage interest, in the future. Those who do will likely tend to be wealthier households with bigger home loans to pay off. Congress did take steps to limit the deduction for wealthy taxpayers too; homeowners can only claim interest on up to $750,000 worth of mortgage debt, down from $1 million previously. But the end result is a rump artifact of the tax code more geared than ever to the McMansion set.

Which is why, if Democrats ever get a chance to kill off the vestigial remains of the mortgage interest deduction down the line, they might as well. At this point, getting rid of the MID would impact relatively few households, and the economic effects would probably be minimal. The major concern that some writers, myself included, voiced about slashing the mortgage interest deduction overnight was that it could end up bringing down home values in some parts of the country, hurting the major source of American middle-class savings. But at this point, there’s little evidence that’s happening (or, to be blunt, I might have been worrying about nothing). Outside of a few select (and extremely luxe) markets like Manhattan, home prices still seem to be rising quickly, and even accelerating. While it’s possible they’d be rocketing up even faster if Republicans hadn’t diluted some of the tax benefits of homeownership, or that the new tax law will become more of a drag as people get more familiar with it, there’s no sign of an imminent crash. For now, any negative effect of the tax law seems to have been drowned out by a healthy economy. And if problems do emerge down the line, junking the diminished remnants of the deduction probably won’t make them all that much worse. In the meantime, Democrats could use the money for a more worthwhile cause—like providing housing help for the people who actually need it.

Correction, April 24, 2018: This post originally misstated that the value of the mortgage interest deduction would fall from $59.9 million to $25 million. Those numbers should be in billions.