The Trump administration is considering lowering the mortgage interest deduction cap to $500,000 from $1 million, according to a recent Politico article. The mortgage interest deduction is a federal program that allows homeowners to subtract interest paid on their home loans from their taxable income. As the Presidential administration considers other tax reforms that would decrease federal government revenue, they’re looking for areas to make up that difference and this is one of them.
As Politico points out, this flies in the face of the National Association of Realtors who strongly supported Trump during his bid for the presidency. But for many—even across the political boundaries that so strongly divide our nation right now—it’s a welcome sign. Politico explains:
Like many issues in tax reform, the mortgage interest deduction divides more along parochial than ideological lines. Conservatives and progressives alike criticize the deduction as inefficient and more useful for wealthy taxpayers than the working class it’s supposed to help put in homes. But its popularity with homeowners in more expensive areas and with the real estate industry have helped it weather past attempts to cut or eliminate it.
The Trump Administration’s reconsideration of the mortgage interest deduction has sparked a wider conversation about its merit and sources on both the left and the right seem to agree that it accomplishes very little. It doesn’t even appear to achieve its stated goal: increasing homeownership. A recent Bloomberg article covers a new study about the effectiveness of the mortgage interest deduction that concludes:
a sharp cut in the preference for top-rate taxpayers (with smaller changes for other taxpayers) had a "precisely estimated zero effect" on homeownership, even in the very long run. The deduction encouraged people to live in bigger houses and borrow more, but that's all.
Interestingly, lowering the cap from $1 million to $500,000 is exactly the solution proposed by Derek Thompson in an article for the Atlantic earlier this year, which we covered.
For the moment, this proposal is just an idea floating around, but if it’s implemented it would be a positive shift toward removing government subsidies for large-scale single family home ownership and allowing personal preferences to drive the housing market more thoroughly.