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Thursday, Dec. 3, 2009 11:39 am

Just extra money

The folly of the mortgage interest tax deduction


For a day or two in late November, it was just like the old days on Wall Street — well, like 2008, anyway. The National Association of Realtors had reported that house sales had risen 10.1 percent in October, several times higher than predicted, and that sent stock prices up. Only a few days before that, the Springfield Building and Zoning Department reported issuing 12 percent more permits for single-family house construction compared to last October. As for existing houses, the Capital Area Association of Realtors reported sales were up more than 8 percent for the three months before Halloween compared to last year.

What is sending so many hungry bears back to the honey pot that seemed empty just a few months ago? Most analysts pointed to the potential $8,000 federal tax credit, recently extended and expanded, that Congress granted to first-time home buyers as part of its stimulus package.

The credit was passed against the good advice of economists by a Congress who convinced itself that the best way to fix an economy crippled by the collapse of a housing bubble is to re-inflate it. One happy buyer of a Springfield duplex admitted to the State Journal-Register that she had planned to buy with or without a federal tax credit. “The tax credit,” she said, “was just extra money.”

It isn’t like house buyers needed any more handouts from the federal till. The deduction of mortgage interest payments from taxable income cost the U.S. Treasury $67 billion in the 2008 fiscal year. That is an astonishing amount of money, enough to provide every uninsured citizen with health insurance, with enough left over to pay for a couple of days of saving Afghanistan from the Afghans.

Even more astonishing, the tab was run up by fewer than one in four of all taxpayers. Not only do the holders of big mortgages have more interest to deduct (which they can do on mortgages worth up to $1 million on first and second homes) but each dollar deducted costs the Treasury more, since such buyers are usually in the higher tax brackets.

In return for this largesse, the nation gets stable neighborhoods, solvent retirees and a more robust economy. Yes, and the Chinese can be made to see reason about the yuan. Home ownership does make for more stable neighborhoods, but the mortgage interest deduction or MID works against stable home ownership. The deduction makes it easier to buy than to maintain — one reason why our neighborhoods remain socially viable only for as long as the average house takes to fall apart.

A house is touted as the only personal investment many people have. That is not a good thing, but even if it were, a house turns out to not be the best investment to make. Over time, residential real estate has done less well than stocks. True, the owners still have a place to live even if there is an economic crash, which is not true of stocks. And while houses can lose value, that value seldom drops below the amount owed unless the owners overbought or overborrowed.

Which the MID encourages people to do. The MID doesn’t make it possible for more people to buy houses. The homeownership rate in countries that don’t allow such breaks, including Australia, Canada and the United Kingdom, is the same or higher than it is in the U.S. Rather than stimulate more widespread home ownership, the deduction simply inflates house prices. Those win who are about to trade down or sell out, but first-time buyers and those hoping to trade up lose. The net economic effect is zero.

The MID in short is expensive and regressive, and for both those reasons is enormously popular. Few of our stalwart yeomen, reaching for this year’s Schedule A, think of the MID as the equivalent of a Section 8 public housing voucher from HUD. The MID is an entitlement nonetheless, cousin to food stamps, unemployment insurance and Social Security.

And like those entitlements, the MID is untouchable politically. Every few years a think tank or government commission, overcome by a fit of common sense, proposes that the deduction be eliminated or replaced by a fairer and less fiscally loony version. Rather than limit it, candidate Obama wanted to extend it, via a refundable tax credit that would allow lower income households who do not itemize to claim the exemption. However, President Obama has proposed further limiting the MID claimable by the well-to-do. Americans, he realized, have better things to do with their money.

Contact James Krohe Jr. at

Thanks to Brian Walsh of the Washington State Department of Transportation for pointing out that Washington state has some 150 true roundabouts, but the “roundabouts” in Seattle’s neighborhood streets are in fact traffic calming devices. 
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