The Wall Street Journal: Houses of Lobbyists
Why should the tax code subsidize home buyers over renters?
President Trump wants American families to pay lower taxes without having to take the time and trouble to itemize. One way he hopes to do this is by doubling the standard deduction, which would make the first $24,000 of income for a married couple tax-free. What’s not to like?
Plenty, says the housing lobby. The National Association of Homebuilders (NAHB) and the National Association of Realtors each bashed the larger standard deduction on grounds that it would make the tax subsidy to their industries less appealing.
At the NAHB, Chairman Granger MacDonald put it this way: Doubling the standard deduction “could severely marginalize the mortgage interest deduction, which would reduce housing demand and lead to lower home values.”
Translation: Without a federal tax subsidy to encourage people to take out mortgages, folks might not buy what we’re selling.
This is less an indictment of the proposed Trump reform than a reminder of how misguided the mortgage-interest deduction is. For starters, it distorts the allocation of capital by favoring housing, a form of consumption, over investments that might be more productive and raise everyone’s living standards.
The deduction also disproportionately benefits the affluent, who buy more expensive homes with bigger mortgages. A 2013 Congressional Budget Office study found that 75% of the benefit of the mortgage-interest deduction goes to the top 20% of income earners. Two of three American tax filers don’t even itemize, which means they can’t deduct mortgage interest even if they have it.
It’s also not clear the mortgage deduction is as critical to home ownership as advocates contend. Canada and Britain have similar rates of home ownership as the U.S. (nearly two thirds of their citizens) without a mortgage-interest deduction. If the housing industry really depends on a tax subsidy, maybe it’s time we ask why the U.S. tax code should favor buyers over renters.
The shame is that neither Mr. Trump nor House Republicans are proposing to eliminate the deduction for mortgage interest. They know it would be good tax policy but they figure it’s too politically difficult. Yet the housing lobby gives them no credit and still yelps about the standard deduction.
The tax debate is still in its early stages, and Republicans should reconsider giving housing a pass. For example, the GOP could limit the amount of mortgage-interest that could be deducted, or limit the deduction to borrowing below, say, $250,000. This would make the tax benefit less tilted to the affluent, and it would also provide more revenue for lower tax rates.
Even after its role in promoting the housing mania and panic a decade ago, the housing lobby wants more subsidies and more political favoritism. If tax reform were really about fairness, housing would be treated no differently than any other industry.
This article was originally published on May 6, 2017 at: https://www.wsj.com/articles/ The Wall Street Journal is a subscription-based publication.