IN THESE DARK DAYS for the Bush administration, I've been looking for some light, something on which to lavish unequivocal praise. And here it is. The president's advisory commission on tax reform on Monday recommended a limit on the home mortgage interest deduction.
But isn't the home mortgage interest deduction almost a fundamental right? Doesn't it help most Americans pay for their homes? Isn't it, in other words, sacred?
No, no and no. As it is designed right now, it mostly benefits the rich, is grossly unfair and costs the Treasury a bundle.
Here's how it currently works. Homeowners can deduct from their income taxes all interest paid on mortgages written for up to $1.1 million. This means people living in mansions with gigantic mortgages get to deduct tens of thousand of dollars a year. It's as if the federal government handed them a giant housing subsidy. But most people who rent their homes don't get a dime from the government to subsidize their cost of housing -- and they generally have far lower incomes than homeowners.
Nor does the mortgage interest deduction help most homeowners with modest incomes -- those in the $20,000 to $50,000 range. That's because, at tax time, they take the standard deduction. According to the IRS, two-thirds of taxpayers don't bother itemizing their deductions. Even if you do itemize your deductions, the home mortgage interest deduction benefits the rich far more than anyone else. If you're in the 33% bracket, for example, a $10,000 mortgage interest deduction cuts your tax bill by more than $3,300. But if you're in the 15% bracket, a $10,000 deduction cuts your taxes by only $1,500.
This is doubly unfair when you consider that housing assistance for poor Americans has been slashed recently. In its determination to cut spending and reduce the federal deficit, Congress is likely to cut low-income housing even more. Even as the economy booms, the nation's homelessness rate continues to rise.
You couldn't design a more regressive housing policy if you tried. The home mortgage interest deduction cost the Treasury $63 billion in lost revenue last year, and the rich got most of it. Yet the entire budget of the Department of Housing and Urban Development -- which, among other things, provides low-income housing -- was just $35 billion.
Enter the president's tax reform commission.
