It's fashionable to say that America's best days are behind us, that we're so divided and dysfunctional that we can't fix what's broken or do anything worthwhile. I believe America is still great, capable of moving toward greater things and righting the wrongs of the past. As it happens, now is the perfect political time to right one wrong in particular: eliminating the mortgage interest tax deduction once and for all.
Maybe this isn't at the top of America's list of problems, and it's far from our country's worst sin, but the mortgage interest tax deduction is a terrible policy. Any expert who isn't in the real estate lobby will tell you that (loudly, at length, and probably with an explosive curse).
The deduction is regressive, benefiting only a small minority of taxpayers (less than 10% in 2020) who earn enough to itemize their deductions. Someone has to make up for the lost tax revenue, so the deduction is transferred from the middle class to the upper class, from mid-range homeowners to luxury homeowners, and from people who save up a big down payment to buy a reasonable home and pay off the mortgage as quickly as possible to people who buy the biggest home they can and take out the biggest mortgage possible. “Tax the middle class heavily so that successful professionals can buy bigger homes in more expensive cities” is obviously not good public policy, although of course it might sound appealing if you're a successful professional living in an expensive urban area like Washington DC.
[Writer looks at her mortgage statement, swallows hard, squares her shoulders and soldiers on.]
Follow this authorMegan McArdle's opinion
Perhaps these inconveniences might be tolerable if they increased homeownership rates, benefiting families and communities. Unfortunately, most studies suggest that increases in homeownership rates would be modest at best. This is not surprising, given that, as noted above, the tax cuts benefit people who could buy (somewhat smaller) homes without them. Australia's homeownership rate of 66 percent, but with no mortgage interest tax deduction for owner-occupied housing, is barely distinguishable from the United States' rate of 65.6 percent.
No matter how small the benefits, it comes at an incredible cost. Because the Tax Cuts and Jobs Act of 2017 limited the deduction by lowering the maximum deduction from $1 million to $750,000 for married couples filing jointly and increasing the standard deduction, this regressive subsidy would cost the Treasury “only” tens of billions of dollars a year. But with the TCJA expiring next year, more taxpayers are expected to itemize deductions on larger loans, which is estimated to cost the Treasury $100 billion a year by 2030.
This is the main reason why now is the time to get rid of it for good.
According to the Tax Policy Center, in 2017, 31% of all taxpayers filed itemized returns. By 2020, that figure had dropped to 9%. It's obviously easier to take something away from 9% of the population than it is to take something away from 31%. Plus, with the TCJA expiring and a major legislative fight over the tax code expected, Congress will be looking for new sources of revenue. And (as congressional staffers gleefully informed me) the days of zero interest rates, when deficit spending was literally free, are over.
Interest rate trends are the second reason why now is a great time to take advantage of the mortgage interest deduction. Right now, most American homeowners are still living off ultra-low interest rates. That's why, while the average interest rate on new mortgages more than doubled between September 2021 and September 2023, the average interest rate on all outstanding mortgages only increased a few tenths of a percentage point.
Of course, things won't change forever. When the TCJA expires, many taxpayers will probably start itemizing again, raising the average interest rate on existing mortgages and making this monster even harder to beat. Moreover, if lawmakers act now, there's another cheat code to help them out: The National Association of Realtors, the most powerful lobbying group in the United States on residential real estate issues, has recently been plagued by internal disputes, external legal challenges, and a civil settlement that threatens to upend the industry's entire financial model.
Congress should act now — with interest rates low, few itemizers, and the National Tax Agency in disarray. I can't promise you that Congress will have an easy time acting, but I can promise you that there's never been a better time to do the right thing.
