Late 2007, early 2008: Financial markets freeze up, the economy goes into a tailspin, over 100,000 homes are foreclosed on in Minnesota and the economy slowly begins limping back to recovery. We all know the story and have seen, or lived, the tragic consequences of the housing downturn.
Looking back and pointing fingers is easy, but as we begin to grow out of the crisis, our state legislators must continue to support sensible policies that protect middle-class Minnesotans. One of those policies is the state mortgage interest deduction. By allowing homeowners to deduct the interest paid on a mortgage, the state mortgage interest deduction provides many homeowners a significant savings at tax time.
The deduction is a remarkably effective tool that facilitates homeownership, the foundation of a healthy middle class and a growing economy. All legislators, regardless of party, should be in favor of policies — like the state mortgage interest deduction — that build wealth for families and allow them to gain a foothold into the middle class.
According to the American Community Survey in 2012, Minnesota had 1,036,410 homes with mortgages on them. The Minnesota House Research Department and Department of Revenue have data showing that 734,000 filers in 2011 received the benefit of the mortgage interest deduction. That means 70 percent of Minnesota’s homeowners with a mortgage itemized and used the mortgage interest deduction. By putting money back in the pockets of Minnesotans, the mortgage interest deduction builds wealth — allowing households to pay down debts, save for their children’s college education, or put money away for retirement.
It’s important to note that many of the 30 percent of homeowners not using the mortgage interest deduction used it while raising their families. These homeowners have seen, and lived, the positive benefits of the state mortgage interest deduction, and they expect this established portion of Minnesota’s tax code to be there when their children look to buy their piece of the American Dream.
An essential role
Furthermore, homeownership tax incentives and savings plans play an essential role in our housing market and markets all across the world, including Canada and Western Europe. Also, many real-estate investment decisions have been made with current Minnesota deductions factored in. To change these established portions of the Minnesota tax code would be changing the rules in the middle of the game, resulting in an unexpected loss of wealth as homeowners would lose out on potential savings each year. Now, more than ever, middle-class Minnesotan homeowners need assurance that promises made to them are kept.
It’s important to note this is a tax deduction for middle-class families, not corporations or banks. It’s one of the few remaining tax incentives dedicated to helping homeowners and families across Minnesota. Purchasing a home remains the mark of middle-class arrival and financial security for millions of Minnesota families. Buying a home for most Minnesotans is a crucial part of achieving the American Dream. The state mortgage interest deduction plays an instrumental role in helping families all across Minnesota realize that dream.
Curtailing the state mortgage interest deduction would be a step backward for Minnesota families, and any changes to the state mortgage interest deduction would have serious consequences on homeownership levels, home values and the recovering economy in Minnesota. There would be less incentive for first-time homebuyers, whose early payments typically consist mostly of interest, to buy — or for “move-up” buyers to enter the market. Working and middle-class families would see a reduction in home values.
Lawmakers discuss potential changes
Discussions in St. Paul have included significant changes to the state mortgage interest deduction. Some Minnesota politicians have proposed eliminating the state deduction altogether. Unfortunately, these discussions overlook the positive effects the state deduction has had on homeownership in Minnesota.
Nearly eight years after the financial crisis and the economic downturn that followed, Minnesota homeowners are finally breathing a little easier. Let’s keep it that way.
Barb Davis is a Realtor at Coldwell Banker Burnet in Minneapolis.
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Important that you used the word wealth
The mortgage interest deduction overwhelmingly favors wealthy people with big mortgages who do not need any incentives to purchase a home. It distorts the housing market by raising the prices of homes. This raises the commissions of realtors in the process which gets to the economic incentive for this article. Without the deduction housing prices would fall which would be better for first time home buyers because they could afford a higher percentage down payment.
It is a regressive tax policy that distorts the economy. It encourages people to take on too much debt and sets the housing market up for larger, more destructive boom and bust cycles. There are many other better ways to encourage people to save for college and retirement.
I don’t deny that changing the tax policy would cause problems for people who planned for the deduction when budgeting for a home purchase but it should be gradually phased out and replaced with a higher standard deduction.
Sop to the Rich
If one truly wanted to help the middle class, one would end this subsidy to the wealthy and lower income taxes for the middle class. I don’t know about Minnesota, but at the national level 70% of the benefit in dollars went to those who earned more than $100,000. This is hardly a well targeted plan.
I would agree with you that government policy should encourage savings – but why in home ownership? It is a lumpy low-return unproductive undiversified asset class. In terms of investment and savings it should be near the bottom.
Now, I am all for encouraging home ownership, but when we are subsidizing something we need to ask at what cost? The US has multiple programs to do so – Freddie Mac and Fannie Mae to reduce interest rates, deductions on interest and property tax. Don’t even get me started on REITs. Canada, Europe, and Australia have similar home ownership rates as America without such huge subsidizes.
No offense
But as someone whose home lost over 75k in value, (really great timing on the home purchase there) screw lowering home prices further. You do that and folks like me, who actually bought a house to ,you know, live in, get shafted again. Most likely we just walk away and put the economy back in free fall as its obvious those who favor this policy arent interested in making us whole when it happens. The most likely scenario I see would be the rise of an ever increasing predatory rental market as those now cheaper homes are snapped up by investors and put on the market through third party management.
If you live in it the current value is irrelevant
Value matters when a home is bought and sold, not when you’re living in it. At that point all that matters is whether your monthly payment costs more than renting.
Really
So it has no bearing at all on my credit rating, or on whether I can use the value of my home as collateral when I might need another loan in the future. The reason we purchased was the fact that what we paid in rent to line the pockets of a worthless rental conglomerate was ridiculous compared to the minor increase we sustained to buy. Rent hasn’t gone down since (I’m always looking) and while we’d love to improve our home to meet our current challenges (2 very rambunctious boys in a not very big space) we have neither the income, nor equity to do so. I don’t live in a lavish McMansion, and I’m not wealthy, the deduction allows me to make then few big ticket improvements to my home I could. (most of which were necessities as appliances and basic structural pieces fail) I would love to stick it to the rich as much as the next guy, but you aren’t hurting them, you’re hurting me.
You want prices to drop, fine
But come up with something that won’t screw those of us unlucky enough to have not waited until after you do so to purchase.
I want taxes to be less regressive
Why inflate property values just to help rich people avoid taxes?
Oh and a final point
Do you plan on increasing the property tax rate, or increasing state aid to municipalities as the fix for the declining local revenues brought about by you price decline. I certainly hope the latter as the former would be another direct hit on folks like me.
Property tax rates
My home value has declined over the past few years but the tax amount always seems to end up the same. Your property tax should end up as a ratio of your property value divided by the property value in the taxing district multiplied by the amount it costs to deliver services.
Removing the mortgage interest reduction should be offset by increasing the standard deduction. That should help most people in the situation you have described. Someone else mentioned that it makes figuring your taxes a lot simpler too.
Doing the math
The estimate is $80B in tax expenditures for the mortgage interest deduction annually. There are about 135 million taxpayers based on a google search. That’s roughly equivalent to raising the standard deduction by $600. Another google search turned up $615 as the average mortgage interest deduction so half the taxpayers who claimed wouldn’t see their taxes go up. Roughly 25% of filers claim the deduction so you would see a net tax cut or close to no change for 88% of filers. Renters and people who have paid off their homes would see their taxes go down. People with mortgage interest higher than average (including those who deduct their second home) would see their taxes go up. Also, your MID will decrease as your interest goes down but the standard deduction won’t.
The article below has different numbers (admittedly mine are sketchy) and shows that the deduction is primarily taken by people living in expensive urban areas. Minnesota does have one of the highest claim rates in the nation, however.
http://www.pewtrusts.org/en/research-and-analysis/reports/0001/01/01/the-geographic-distribution-of-the-mortgage-interest-deduction
Mortgage interest
I guess I see this differently than others. The money I get back from the deduction helps me. It doesn’t matter if someone who spent more (or less) on their home gets more back (or less) back.
Look at the big picture
As a tax payer, I would think you would want you money well spent. So why are we subsiding the rich?
The average American has their income tax reduce by about $500. Those that earn in the 40% to 60% range get $250. Those in the top 20% get $2500. Consider, if we could eliminate the interest deduction and reduced the income tax by $500 80% of the people would be better off and government revenue would not change. Where is the downside in that? Emotionally you would lose a deduction Rationally you would have more money and less paperwork when filing taxes.
Clarification?
I suspect you’re referring to monthly savings. Correct?
Provided of course
That that tax rate doesn’t ever change while I own my home.
“In any event, the big picture here is clear. Households earning more than $200,000 a year account for less than 10% of the returns, but get 30% of all the benefits. And households earning more than $100,000 a year get 69% of all the benefit. The mortgage-interest deduction might be a middle-class tax break, but realistically it’s an upper-middle-class tax break.”
2011
http://blogs.reuters.com/felix-salmon/2011/07/12/chart-of-the-day-where-does-the-mortgage-interest-deduction-go/
That being said, other sources I consulted indicate that the inflationary effect of the home mortgage interest tax deduction amounts to a few percent.
The annual $80 billion tax expenditure (+/-) for this deduction amounts to a very small percentage of the $3.7 trillion 2014 budget. (.23%, if my arithmetic is correct.) Could the money be better spent? Perhaps.
I expect that many would see any phase out to be unfair, in that it would permit some to continue to deduct interest payments, perhaps for as much as 30 years, while others would be denied that benefit.
I wish
100k was upper middle class. We make just under and it sure doesn’t feel like it with kids, student loans, and a mortgage.
You misread
The commenter was stating that people that make over $200k a year (upper middle class) receive disproportionate benefit. They account for 10% of the people and 30% of the cash coming back.
Sorry to Say
Your family is doing pretty well…
https://wikis.uit.tufts.edu/confluence/download/attachments/51453943/Hennepin%20County%20Median%20Household%20Income.gif?api=v2
Though I can relate to how expensive kids are.
Perhaps…
if people bought what they could afford instead of what they really wanted the predatory lending would dry up and these homes would not be reposessed or go to short sales. Every time there is a short sale or re-po in my neighborhood the value of my home drops.
Well
Considering the prices of the homes when I purchased, you would have a mostly vacant block. Does that sound preferable. Granted they went down, but given your sides penchant for wage deflation I expect you’ll be surrounded by rentals soon enough.
I would rather..
have an empty block than have neighbors with the potential to default on their mortgage, have their homes go to short same and watch the value of mine plummet. We have had a number of short sales in my neighborhood over the last few years. Funny that these people could care less. At the same time they park big boats as well as luxury cars in their driveway. They also have what is almost considered a necessity in Minnesota, that is a “lake home” or a “cabin.” I don’t get it.
Confused
I have often been tempted to move west of 494 into those beautiful new larger homes in west Plymouth or Maple Grove, then I remember what is important in life and put another coat of paint on the house… I think we have been here a bit over 20 years now.
I did find it amusing back when the mortgage broker kept telling me I could afford way more house… It seems a lot of people fall for that.
Though I would love to get rid of the mortgage deduction since I think it has encouraged many people to get in over their head, I think its loss would cause near disaster.
Though doing it at the state level only may not be too bad.
Matt, The reason people built those more expensive homes is because that is what the buyers wanted. If they could not afford as much, smaller homes would have been built.
Close
If the buyers couldn’t afford expensive homes then rental property probably would be built, which is what we are seeing today. Minimum lot size ordinances, high property values and other things factor into what developments are profitable for builders. Small single family homes are not very profitable compared to luxury homes or townhomes/apartments.
Condominiums
I have been to South Korea and China a few times in the last year. Due to their population density issues they build 30 story condominiums by the the 1000’s. Yet many of us American’s envision homes as a detached building with a yard.
I guess I disagree, to me it seems the builders will build what people will buy or rent. And if there are enough people out there willing to carry a large mortgage to get that 3000+ sq ft house, they will build that.
Imagine if Americans decided that anything bigger was “excessive” and stopped choosing to buy or rent them. I am thinking the prices of those big houses would drop pretty quick.
Why only 2 choices?
Why are the choices “keep it” or “dump it?” The argument for dumping is that it disproportionately benefits the “rich” while the argument for keeping it is that it helps “the middle class.” While both of these things may be true, I’m not sure that there are only 2 options. Like it or not, the housing market is a stabilizing factor to the economy when it is stable itself. By incentivizing purchases, a tax break for having a mortgage somewhat stabilizes the market. However, by incentivizing over payment for housing, it also can contribute to destabilization, though, I would argue that the banks probably are more at fault than the tax incentive. So, why not simply modify the mortgage interest deduction? I don’t buy that we need to simplify the tax code, by the way. A simpler tax code does not necessarily make it better.
Personal Responsibility
Blame the deduction… Blame the banks…
In your view, what did the Home Buyer who signed the mortgage promising to pay back the money at defined terms contribute to the problem?
Or was somebody forcing them to sign? Does personal responsibility still exist?
Home buyers weren’t falsifying documents after they were signed
Buyers weren’t conspiring to make mortgage debt look like no-risk securities. Buyers weren’t creating financial instruments to bet against the bad mortgage debt they created and sold off as no-risk securities.
I agree there is an alarming amount of ignorance when it comes to obtaining a home loan. At one signing I was looking over the mortgage papers for errors and the person in charge said “Oh, you’re one of those readers” implying the overwhelming majority of people don’t even read a document regarding the biggest financial decision of their life.
However, the buyers cannot create a home mortgage meltdown like we saw in 2008. The banks committed fraud looking for a quick buck and it caused a recession.
PS – I did find errors and made them correct them before I signed.
Contributing factors
I think the meltdown required the cooperation of many different parties.
Home Buyers, Brokers, Banks, Investment firms, Government
In their own way they all contributed because they all wanted “more”.
I agree
There clearly aren’t only two choices. I would favor capping the deduction at a reasonable level, or better yet, giving all homeowners a credit commensurate with the value of a capped deduction. The credit would allow all homeowners to received a benefit regardless of whether they make enough money to itemize and would provide a disincentive for purchasing more home than one could afford.
All homeowners already receive a tax incentive
It’s called the homestead credit on your property taxes. Do we need federal, state and local tax incentives? Other countries don’t have all of these incentives and they still have home owners. The MID isn’t really a home-owner incentive but instead a home-borrower incentive. It encourages people to borrow against their home instead of paying off the mortgage.
Addiction
It seems our economy is highly dependent on Americans buying bigger and better homes on a regular basis. If anything disrupts the flow of new buyers we go into a violent economic withdrawl.
In my world travels it is our American homes that stand out for me as probably our biggest most visible form of “American Excess”. I mean they are far bigger than necessary, expensive to maintain, heat, cool, etc. Well maybe right behind that lady with the Yukon XL Denali that has no hitch on it….
I remember my Uncle’s starter home in Apple Valley almost 40 years ago. I think it had 2 bedrooms and one bath on a small empty lot. Now that would be consider inadequate to many people.
it is yearly
Remember, it is the average benefit. That is, how much people would save by itemizing verse taking the over taking the standard deduction. For example, many people don’t take the mortgage interest deduction because the standard deduction is higher, so their benefit would be zero. For most people who itemize, the mortgage interest deduction is their biggest item, but it usually only offers a modest bump.
Of course, it would also be zero for those who rent, so that too would pull down the average.
Here are the numbers.
http://www.taxpolicycenter.org/uploadedpdf/412099-mortgage-deduction-reform.pdf
Mortgage Interest Deduction Helps Middle Class Families
My husband and I were first-time homebuyers in 2009. As newlyweds we saved and saved before we were able to own a home. When we closed on our house we were thrilled not only to put down roots in the community but also appreciated the tax deductions that came with homeownership, including the mortgage interest deduction. The mortgage interest deduction helped make owning a home more affordable. Now that we have a new baby we are hoping to move in to a home with more bedrooms and we are counting on the mortgage interest deduction to help us make the transition. On behalf of young families trying to make every dollar stretch – I hope the mortgage interest deduction remains unchanged.
Look at that article from Pew
They estimate that eliminating the MID would increase purchases by new homeowners because home prices would be about 10% lower thus requiring a smaller down payment. They also suggest a $1000 refundable tax credit for a first home purchase would be the best way to encourage first time home buyers. As a homeowner myself I will say that counting on a mortgage interest deduction to make house payments means you’re taking on quite a bit of financial risk.
If your standard deduction was $600 higher you could have saved that much more while you were renting. If home prices were 10% lower you could have purchased one sooner or you might have continued to save and waited until you had the baby to buy a home for the first time.
Not That Helpful
The interest deduction isn’t as helpful to the middle class as it seems at first glance. It only benefits one to the extent that it exceeds the standard deduction. If one itemizes and deducts, say, $14K of which $7K is interest, and the standard deduction is $12K, the benefit certainly looks less helpful. As the balance gets paid down, the benefit goes down every year. I’ve stayed in my home, and the interest now is low enough the standard deduction is a better deal for me. The mortgage payments last far longer than the deduction.
Separately, if part of the rationale is that home ownership contributes to more stable communities, it may make some sense for the purchase of a first home. But how does it contribute to social stability for me to sell my first home and buy a second? I’m already a homeowner and stabilizing my community. If selling one home and buying another means losing that deduction, I may choose to stay where I am and work to improve the neighborhood I’m already in.
Also, why we allow deductions for homes over $400K (or so) is beyond me, save for some very expensive communities like San Francisco, NYC, etc.