Ellison proposes capping mortgage-interest deductions

WASHINGTON — Rep. Keith Ellison, citing a lack of housing opportunities for the would-be middle class, said he’s in the process of drafting legislation aimed at fundamentally restructuring the tax code as it relates to homeownership.

Under Ellison’s bill, the cap on mortgage interest-deductions will be reduced from the first $1 million of principal to just the first $400,000. That deduction will then be turned into a credit, so that every cent of mortgage interest paid is refunded by the government. Early estimates indicate the measure would save about $27 billion a year — money that would go to improving housing options for lower-income Americans.

That bill was one of several solutions proffered Thursday at a forum Ellison hosted here on the economy and working class Americans, part of the Congressional Black Caucus Foundation’s annual legislative conference.

“We’ve got to fight for Middle Class prosperity,” Ellison said. “We’ve got to reorder this economy in a way that it gives working class families a chance to succeed.”

The severity of the situation had an exclamation point placed some hours after Ellison’s panel concluded. The Census Bureau released its latest poverty statistics late Thursday — one in seven Americans now live in poverty.

And for those in that bracket, finding housing is a difficult-at-best proposition.

 “There is no place in America where a one-bedroom apartment is affordable on a minimum wage income,” said Sheila Crowley, President of the National Low Income Housing Coalition (NLIHC).

The federal minimum wage is $7.25 an hour. Crowley said a worker would have to earn $18.44 an hour to reasonably afford an average two bedroom home (defined as spending no more than one third of income on housing), up from $12.46 an hour ten years ago.

For those who don’t clear that hurdle, she said, housing is hard to come by. Affordable low-income housing just simply isn’t in enough supply to meet demand.

Some 9.2 percent of Americans are in the working poor, making 30 percent of their area’s average income or less. According to NLIHC figures, just six percent of rents are within the reach of their pockets.

And as bad as the situation is on Main Street, it’s even worse on Martin Luther King Street panelists said, stressing the impact of the economic crisis on majority minority communities.

“Not all main streets are created equal,” said Michael J. Wilson, executive director of Americans for Democratic Action. “This is a different kind of unemployment, not the 9.6 unemployment rate or the 16 percent real unemployment rate.”

The unemployment on MLK Street, he said, was actually 16.3 percent. Add in those who want a job but have given up on finding one, and “we calculate that real rate at 20 percent — one in 5.”

“Main Street hasn’t seen a recession like what we’re seeing on MLK Street since the Great Depression.”

Housing and Urban Development Secretary Shaun Donovan said the solution to that is partly continuing targeted stimulative spending on the “areas that need it most.”

Some 60 percent of the stimulus law’s funds went to central cities, he said. A third went to congressional districts represented by members of the Congressional Black Caucus and Congressional Hispanic Caucus, though their districts make up just 10 percent of the population.

In those lower-income neighborhoods, he said, foreclosures are more likely to occur. They reduce property values by 5 percent if you live next to a foreclosure, he said, but can have a multiplicative effect and imperil a neighborhood’s chance of economic recovery.

“It is one thing if you have one foreclosure in a community — it’s another thing if you have a dozen foreclosures on a block.”

For Ellison, the ability to rise above that situation starts with people having a stable housing situation.

“Think of a family as making a cake,” Ellison said. “Then take away the bowl. Making a cake without a bowl is like raising a family without a house.”

Comments (7)

  1. Submitted by Craig Hoffmann on 09/17/2010 - 12:29 pm.

    The cap goes down from 1 million to 400K….reasonable idea.

    The deduction becomes a credit, so the government pays ALL the interest…terrible idea! Why would I shop for a good interest rate, or even try to maintain a good credit rating? Why would I care if I got a 12% interest rate…the government is paying the interest. Why not refinance all of my debts into a home equity loan…that way the government pays the interest.

    Just lower the cap, limit the number of years you can claim the deduction, or even better put a lifetime cap of X dollars of deductions.

  2. Submitted by Steve Rose on 09/17/2010 - 01:02 pm.

    “Early estimates indicate the measure would save about $27 billion a year — money that would go to improving housing options for lower-income Americans.”

    Save? The word “save” seems to have suffered a redefinition. It means to take money from those who earned it and give it to the federal government. The federal government will redistribute it or squander it as they see fit.

    Where is MLK Street?

  3. Submitted by Brian Simon on 09/17/2010 - 01:27 pm.

    Craig makes a bunch of good points, particularly about the ‘credit’ idea. Perhaps a compromise would be to cap the credit at the prime rate, which would leave buyers motivated to reduce the amount of interest they pay above prime.

  4. Submitted by John Edwards on 09/17/2010 - 04:19 pm.

    One major oversight in Craig’s message. It is the taxpayer, not the government, who would pay the interest. Ellison’s idea simply means someone will be made to contribute to the housing cost of another, which is fine if you subscribe to that theory.

  5. Submitted by James Hamilton on 09/18/2010 - 12:09 pm.

    Turning the mortgage interest tax deduction into a tax credit and limiting it to mortgages of $400k or less would be completely insane. Housing prices above that limit would collapse completely while those with qualifying mortgages would have no real incentive to shop for the best rate. Why bother, when it comes of the top on your taxes and withholding can be adjusted to reflect your net tax?

  6. Submitted by Dennis Tester on 09/18/2010 - 10:31 pm.

    “There is no place in America where a one-bedroom apartment is affordable on a minimum wage income,” said Sheila Crowley, President of the National Low Income Housing Coalition (NLIHC).

    That has never been the case. It wasn’t the case when I was making $1.35 bagging groceries in 1966 and it isn’t true now. And like me in 1966, the vast majority of people earning minimum wage are teenagers living at home. So what’s your point, Ms. Crowley?

  7. Submitted by Ray Schoch on 09/20/2010 - 11:44 am.

    Putting a cap on mortgage interest deduction is social engineering – in the same way that allowing a mortgage interest deduction is social engineering. Whether you like it or not depends upon who the engineer might be, and whether you’re riding the train.

    I’m not sure I’d support Ellison’s proposal – doing something about overall tax rates might be more productive in terms of making the goal of housing affordability a reality, and critics are correct that it basically takes money from one group and gives it to another, but that’s what the mortgage interest deduction does now, by subsidizing middle-class (and up) housing at the expense of the working poor and others who simply cannot afford “ownership,” and thus have no housing deduction on their tax returns. You can find mechanisms to redistribute income more equitably to some degree, or you can argue that it shouldn’t happen at all, which encourages living in cardboard boxes under highway bridges while the kids starve.

    That latter possibility doesn’t strike me as a very positive scenario, but those of the Ayn Rand persuasion may find it attractive.

    In principle, I’ve no problem with a cap on the mortgage interest deduction. No reason for those of modest means to subsidize the housing of those in the upper brackets.

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