Research & Commentary: The Home Mortgage Interest Deduction

Published August 8, 2011

Few public policy issues evoke more fervor than those promoting homeownership. The recent economic collapse resulted in large part from such policies, and the federal and individual state governments have spent much time and money handling consequences ranging from foreclosures to the fate of Fannie Mae and Freddie Mac.

The largest single effort to promote homeownership, however, isn’t a program at all but a feature of the tax code: the mortgage interest deduction.

Current tax law allows homeowners a tax deduction for mortgage interest payments (with a limit of $1 million for home acquisition debt and up to $100,000 for home equity debt). Today several proposals are being considered to reduce or eliminate this deduction. According to The Wall Street Journal, current proposals include limiting the deduction for upper-income households; replacing the deduction with a refundable tax credit of 15 percent for the first $25,000 of mortgage interest paid on a principal residence each year; and phasing out the deduction over time.

Supporters of the mortgage interest deduction, including real estate agents, homebuilders, and many homeowners, say it is an incentive for homeownership and is crucial to maintaining the housing market. The National Association of Realtors states, “Home prices, particularly in high cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented.”

Opponents of the mortgage interest deduction say it has done very little to increase the rates of homeownership, is an unnecessary government subsidy of the housing market that pushes prices higher than they should be, and causes a misuse of resources. Andrew Chamberlain of the Tax Foundation writes, “by giving a tax subsidy to housing, [the deduction] distorts investment decisions toward houses and away from assets like factories and equipment that are more productive. And that makes workers less productive, ultimately lowering wages and making society poorer.”

The following documents examine the mortgage interest deduction, and proposed changes to it, from multiple perspectives. 


Mortgage Interest Deduction Fails by Most Measures
This story by Anthony Randazzo of the Reason Foundation, published in The Heartland Institute’s FIRE Policy News, describes the mortgage interest deduction as a fiscally irresponsible policy and outlines the failure of Democrats and Republicans to overturn it. 

Housing Values Largely Unaffected by Flat Tax without Mortgage Interest Deduction
For taxpayers interested in a flat tax but concerned about the effects of losing their mortgage interest deduction, this Tax Foundation study offers good news: On average, the value of the nation’s housing stock is unlikely to be affected significantly by the flat tax currently under debate.

The Mortgage Interest Deduction and its Impact on Homeownership Decisions
This paper examines the impact of the combined U.S. state and federal mortgage interest deduction (MID) on homeownership, using data from 1984 to 2007 and exploiting variations in the subsidy across states, over time, and due to interstate moves. 

The Much Loved, Little Used Mortgage Deduction
Writing in FIRE Policy News, Ann Logue examines the mortgage interest deduction and its effect on the housing market. She argues the deduction creates a distortion in the market by making the cost of borrowing money cheaper for those who borrow enough to be able to take the deduction. 

Who Benefits from the Home Mortgage Interest Deduction?
In this Fiscal Fact piece, Gerald Prante of the Tax Foundation discusses recent IRS data showing few low- and middle-income taxpayers benefit from the mortgage interest deduction. 

End Mortgage-Interest Deduction
Mark Calabria of the Cato Institute advocates elimination of the mortgage interest deduction, saying it runs up house prices, making housing less affordable and increasing price volatility. 

What’s the Future of the Mortgage-Interest Deduction?
This Wall Street Journal article collects quotes on the future of the mortgage interest deduction from several experts, including representatives from the academic and policy world and real estate and financial industries. 

Goring the Wrong Ox: A Defense of the Mortgage Interest Deduction
This article from the National Tax Journal argues the mortgage interest deduction has a potentially profound effect on housing demand in terms of present value and cash flow. The authors argue against eliminating the deduction. 

Who Needs the Mortgage-Interest Deduction?
Roger Lowenstein writes in The New York Times that the mortgage interest deduction is overrated as an icon and misdirected and unfair as tax policy. He argues it should be phased out. 

Capping the Mortgage Interest Deduction
Economists John E. Anderson, Jeffrey Clemens, and Andrew Hanson examine the economic implications of several policy options for capping the mortgage interest deduction. 

Fundamental Tax Reform: Options for the Mortgage Interest Deduction
This report from the Congressional Research Service describes the mortgage interest deduction and provides an economic analysis of it, concluding with an analysis of the potential impacts of proposed changes to the deduction.