It's the tax deduction that economists love to hate but has huge support among Americans. The mortgage interest tax deduction has long been defended on the basis that it encourages home ownership, but a new study may undermine that justification.
Nick Timiraos at the Wall Street Journal writes about a new study that challenges that rationale: "The ZIP Code-level analysis of Internal Revenue Service data, conducted by a team of economists for the right-leaning R Street Institute, examined how tax benefits are distributed across income levels and major metropolitan areas. The study estimates that tax preferences, particularly the mortgage-interest deduction, have helped drive up the size of houses by as much as 18 percent in the nation's most affluent areas while not broadly encouraging people to buy homes."
The R Street Institute's article on its study shows the type of money that is at stake: "The cost of the tax benefits for owner-occupied housing adds up to about $175 billion annually, with the mortgage-interest deduction alone costing the Treasury roughly $100 billion. The five-year costs of these tax benefits total well over $1 trillion. To put this amount in perspective, one year of tax benefits for owner-occupied housing costs more than the discretionary budgets of the departments of Education, Homeland Security, Energy, and Agriculture combined."
Alan Pyke at ThinkProgress says, "That's enough money to finance universal preschool for every American child for the next decade."
ThinkProgress also analyzes the 18 percent increase in size the study says the deduction is responsible for: "The average house sold today has more than 2,500 square feet of space. That's 750 square feet larger than the average size of a house bought in 1980 and 400 square feet larger than the average home sold in 1990, according to the researchers. Larger homes are more expensive homes, so by inflating the size of houses on the market, the mortgage interest deduction is likely pushing up the price of homeownership for everyone. That's good for real estate agents, but not for middle- and low-income families."
The R Street Institute says, "In fact, the tax benefits afforded to homeowners are highly regressive, extremely expensive, and of little obvious value to society at large. Even if we do want to encourage homeownership through the tax code — and it is by no means obvious that we should — there are far better ways to do so."
Hamilton Nolan at Gawker says "subsidizing extra square footage in the homes of the wealthy is an unquestionably grotesque policy outcome." Nolan's solution is to build low-income housing and give money to low-income people to buy homes. And "make people with multiple homes give one of those homes to the poor."
But as an article in the Deseret News pointed out, "The deduction is certainly popular — with about half of mortgage holders taking advantage of it and, no doubt, wanting to hold onto it."
The Deseret News story points out that the National Association of Home Builders found 71 percent of voters oppose eliminating the deduction.