For decades the mortgage interest deduction (MID) has been masquerading as a promoter of homeownership and healthy communities when it’s mostly just a subsidy for the well off that costs the treasury a boatload of money. As for the communitarian benefits of homeownership, recent history has shown that it’s not all that it’s cracked up to be.
So, with the federal government in deep financial distress and the MID costing the treasury an estimated $131 billion in 2012 (or $210 billion if you add in ancillary tax breaks), why not end the deduction, or at least phase it out? Aside from shrinking the deficit, phasing out the MID would provide a much-needed correction in the housing market, tilting it away from super-sized homes that require excessive driving toward a more efficient housing model better tuned to future needs.
Indeed, phasing out the MID should be part of a larger effort to end all kinds of government subsidies — including those for oil companies — that prop up the wasteful and excessive lifestyles of the past while shifting encouragement to clean energy alternatives and housing choices that fit the demands of future communities.
President Barack Obama made a good start on Thursday when he proposed a new tax credit and other measures to encourage businesses to invest in clean energy technology — steps that he said could save $40 billion a year on utility bills. Earlier this week, the president said his budget, set for release later this month, will propose eliminating $4 billion a year in subsidies and tax breaks to oil companies. (Those same companies would get some of that back in new incentives for natural gas production.)
Commission proposed scrapping it
Obama has been silent of late, however, on the mortgage interest deduction. Several times in 2009 he had hinted at its demise. His deficit reduction commission proposed in its final report last year that the MID be scrapped in favor of a flat 12 percent tax credit. But the MID never came up in his State of the Union address. While the president touted a simplified tax code and said that the government must rein in “spending through tax breaks and loopholes,” he offered no specifics on the MID’s fate.
It’s clear that the real estate industry would vigorously resist any attempt to roll back the deduction. It’s “one of the pillars of our national housing policy, and limiting its use will have negative repercussions for consumers and home values up and down the housing chain,” Michael Berman, chairman of the Mortgage Bankers Association, told HousingWire.com.
Lawrence Yun, economist for the National Association of Realtors, even went so far as to tell the Wall Street Journal that ending the deduction would “surely put us in a broader economic recession.”
Those comments carry the ring of desperation, however, as the downside of homeownership becomes more apparent. “There’s an increasing understanding that single-family housing has been over-subsidized, and that’s to the detriment of the broader economy,” Mark Sandi, chief economist at Moody’s Analytics, told the Wall Street Journal.
‘Not the most enlightened public policy’
Christopher Leinberger, an urban land strategist at the Brookings Institution, told me: “It’s not the most enlightened public policy unless you believe in reverse Robin Hood policies — take from the poor and give to the rich.” As for its spatial impact, Leinberger said the MID disproportionally helps drivable suburban places at the expense of walkable, urbanized locales that typically have more renters. Renters — including larger numbers of younger people and down-sizing baby boomers — don’t get the tax break. Yet that’s the portion of the housing market that needs to be encouraged, he said.
Jim Solem, a local consultant who works with the “Rethinking Housing” coalition, said that ending the deduction now would probably depress home prices even further. Still, he said, there’s “a new reality” afoot that may keep values down for years, both because aging Boomers are “trapped” in their homes and because younger people lack the job stability of past generations.
The best report I’ve read on MID comes from the Urban Institute and the Tax Policy Center. The report [PDF] traces the deduction’s history to the beginnings of the Federal Income Tax in 1913, when all interest payments were made deductible. The rationale of homeownership being good for the community didn’t emerge until after World War II. By 1986, when most deductions were eliminated in a broad reform, the MID survived as a sacred cow.
Actually, it’s available only to the one-third of taxpayers who itemize, meaning that its benefit accrues almost entirely to the upper-middle class. (The very wealthy tend to have paid off their mortgages.)
The report spells out the benefits of homeownership on communities (owners take better care of property and are more apt to be engaged in civic affairs, etc.). But it concludes that those people would likely own homes and care for property with or without the deduction. The deduction’s main impact, it says, it to encourage relatively wealthy buyers to purchase larger, more expensive homes or second homes. It notes that the value of the deduction has risen and fallen tenfold over the past 50 years while the rates of homeownership have remained stable — between 63 and 68 percent. (Other reports note that Canada has a similar rate of homeownership without MID.)
If the object is to increase homeownership, a tax credit available to all taxpayers would be fairer and probably more effective, the study concludes.
But as the current housing crisis illustrates, homeownership can be too great a burden in an economy that no longer offers the stable employment that it once enjoyed. All kinds of forces — economic, environmental and social — are forging a new housing market. It will be unlike the monolithic, single-family, auto-oriented suburban market of the post World War II era. It will be more varied. There will be a greater number of smaller homes, shorter driving trips, more transit, more multi-family housing types, more mixing of homes, offices, shops and other attractions. The challenge for government is to shift its subsidies in ways that encourage rather than encumber the emerging market.
Cheers and boos
Boos for higher taxi fares in Minneapolis. The City Council expanded cab service several years ago with an eye toward more competition and lower costs. Looks like it’s not working. The city already allows some of the most expensive cab rides in the nation — rides are cheaper in New York, Chicago, San Francisco, Denver, Atlanta and Washington, D.C. Higher fares will just deter more riders. I’d love to see a semi-deregulated system: more taxis, lower fares, more riders, more convenience.
Cheers for St. Paul’s refocused efforts on downtown development. The Capital City Partnership will target business retention, growth and recruitment while cooperating with a new metro economic development organization (yet unnamed). The Riverfront Corporation, meanwhile, will focus on public places and civic engagement, especially on the Central Corridor, Lowertown and Great River Park. More in the coming weeks.
Cheers for the selection of Patrick Born as the Metropolitan Council’s new regional administrator. As Minneapolis’ finance director, Born has been a pivotal figure in guiding the city through difficult times while showing considerably more discipline and foresight than the state on issues like paying down debt and explaining hard choices to voters.
In metrospect: Three significant stories this week
Wal-mart surrenders to preservationists on Virginia battlefield site. The Washington Post reports on the giant retailer’s decision to abandon plans for a future store on the site of the Battle of the Wilderness (1864) in Orange County, Va.
Dashed plans: Dreams that went nowhere. This New York Times slide show highlights proposed projects in the city’s history that never happened, inspired, perhaps by the failure of Mayor Michael Bloomberg’s idea for a giant sports stadium on Manhattan’s West Side.
Buy local? MSP does poorly in national survey. This new study from Civic Economnics and the American Booksellers Association ranks metro areas on the vitality of their local retail shops. The Mid-Atlantic, New England and Pacific Northwest do best; the Midwest does worst. Top 25 markets for local retailers include New York, San Jose and Austin. Bottom 25 markets include Sioux Falls, Cleveland and Columbus, Ohio. Of the 17 U.S. metro areas with more than 3 million people, Minneapolis-St. Paul ranked next to last.