You could be forgiven for thinking that the tax plan announced by Trump last week left the mortgage interest deduction (MID) alone. The creators of the plan were explicit and careful to note that the deduction would not be touched. This program (the third largest entitlement program in the United States after Social Security and Medicare) costs the treasury north of $70 billion each year. By allowing homeowners to deduct the interest they pay on their mortgages from their taxable income, the program theoretically lowers the cost of borrowing and, therefore, the cost of homeownership. And yet, in what the New York Times called in a headline “the most sweeping tax overhaul in decades,” even any conversation about reforming the MID was considered out of bounds from the get-go.
Inevitably, a program as big and as central to the tax code as the MID was going to get dragged into the conversation. Last Wednesday, the very day that Trump announced a tax plan that would leave the MID alone, the president of the National Association of Realtors strongly denounced the new tax plan… Because of the fact that it would undermine the MID. How so? By doubling the standard deduction, the threshold at which it makes financial sense to itemize a tax return and thus claim the mortgage interest deduction would go up. In his denunciation, the NAR president claimed that any new tax plan “should first do no harm to homeowners.” It’s important to note, however, that any homeowner who determines that a doubling of the standard deduction means that claiming the MID no longer makes financial sense would be left better off – in any case in which a homeowner would be better off under the status quo, they can continue to itemize their deductions. It would, however, mean that their tax return is no longer predicated on homeownership, a fact which is clearly threatening to the lobbying arm of American home sellers.
In response to the pushback from the opponents of the doubling of the standard deduction, President Trump’s chief economic advisor Gary Cohn argued that the mortgage interest deduction doesn’t actually encourage American citizens to buy homes. Rather, he said, Americans buy homes because “they’re excited and optimistic about the economy.” On this front, research bears him out. An important paper from 2003 by Ed Glaeser and Jesse Shapiro showed that the MID really does very little to incentivize homeownership, though it does encourage homeowners to buy more expensive homes than they would have otherwise. Since that paper, further research in the United States and abroad has reinforced this analysis.
With a tax plan that does-or-does-not undermine an entitlement program that does-or-does-not incentivize homeownership, it seems like a good time to step back and assess this program anew. Primarily, why do we want to encourage homeownership? There is really very little evidence that promoting a nation of homeowners meaningfully increases the public good. Much of our fetishization of homeownership can be traced back to the Cold War when William Levitt famously pronounced “No man who owns his own house and lot can be a Communist. He has too much to do.” Much of the economic pain of the 2008 housing crisis fell on families who lost their homes, convinced that civic virtue and homeownership were inextricably linked. In fact, homeownership has large negative outcomes for the economy. Because homeowners can move less-easily, workers are not as able to move to new cities and new neighborhoods in response to a changing economic environment. Earlier this year, the Upshot estimated that this overemphasis on homeownership hurts our national economy to the tune of some $1.5 trillion each year.
Even if the mortgage interest deduction did encourage homeownership, it is unclear that incentivizing such behavior supports the public good in a meaningful enough way to warrant its annual price tag of nearly $100 billion. But, even as it is unclear whether it is successful at encouraging the behavior it claims to, the MID is very clearly contributing to economic inequality in the United States. As Matthew Desmond wrote in May, homeownership has become the main engine of economic inequality in the United States today. This massive entitlement program, for instance, goes overwhelmingly to families making more than $100 thousand dollars a year while doing absolutely nothing for families who are unable to own their own home or simply don’t want to. As City Observatory noted two weeks ago, home-owning families have roughly 100 times the wealth of families who rent. What’s more, these wealth impacts have cross-generational impacts even as the consequences fall overwhelmingly on families of color. While there’s mixed evidence on the efficacy of the MID as an incentive program, there’s little doubt on its negative social impacts.
Liberals in the United States should dislike the mortgage interest deduction because it is a government spending program whose benefits are enjoyed primarily by whiter, wealthier citizens at the expense of poorer communities. Conservatives should dislike the program because it is an enormous entitlement program that intrudes on the free housing market even as its efficacy is in question. And finally, the question which we’re long overdue to discuss as a country: even if the mortgage interest deduction did incentivize homeownership over renting, and even if it was structured in an equitable way – is it good enough for the public that it’s worth spending billions and billions and billions of dollars on every year?