Martin Dyckman: Home mortgage interest deduction, the third rail of real tax reform

There’s a $71-billion federal welfare program that costs more than aid to needy families, more than the earned income tax credit for working families, and almost as much as food stamps, but goes in great measure to people who don’t really need it.

I’m on that dole. You may be, too.

It’s the home mortgage interest deduction, the largest of the loopholes in the tax code, and the one that almost nobody in Congress or the White House has the guts to talk about, much less touch.

An article in the May 14 New York Times Magazine argues convincingly that the mortgage interest subsidy has contributed to making homeownership “the engine of American inequality.” It’s the big reason why the average homeowner has 36 times the net worth of someone who rents.

Florida aggravates that inequality with its generous homestead exemption for owner-occupied residences. That issue deserves some thought before voting to make matters worse, as a constitutional amendment on the November ballot would do.

The Times Magazine author, Matthew Desmond, won the Pulitzer Prize for his 2017 book, “Evicted: Poverty and Profit in the American City.” He quotes a 1996 study that concluded that eliminating the mortgage interest subsidy and the real estate tax deduction would depress home prices by as much as 17 percent. Turn that around, and it means the government has artificially inflated the value of what constitutes the principal asset for many homeowners. Meanwhile, it puts far less money into assistance for renters, who are the ultimate victims of this policy.

“The MID allows homebuyers to collect more after-tax savings if they take on more mortgage debt, which incentivizes them to pay for more for properties than they could have otherwise,” says Desmond. “By inflating home value, the MID benefits Americans who already own homes — and makes joining their ranks harder.”

Even if it could be fairly argued that homeowners deserve government handouts that renters don’t, the mortgage interest deduction is skewed, like virtually all deductions, entirely in the wrong direction. That works three ways.

The larger one’s mortgage, the more the interest you pay, and the more that the government effectively refunds to you. The higher your marginal tax bracket, which usually reflects how wealthy you are, the greater is the percentage of that government refund. And if you don’t have enough deductions to itemize them, or don’t figure it’s worth the bother, you’re not on the dole at all.

The only limits, for joint returns, are a $1-million cap on the amount of deductible debt for a primary residence and $100,000 on deductible home equity borrowing.

In 2014, Desmond points out, there were 1.5 million households earning between $40,000 and $50,000 a year whose tax returns claimed the interest deduction, receiving an average benefit of $14 a month. Meanwhile, 6.5 million households with earnings above $200,000 deducted mortgage interest for an average benefit of $391 a month.

“What this means in aggregate,” Desmond writes, “is that households with at least six-figure incomes receive more than four-fifths of the total value of mortgage interest and property tax deductions.”

Real tax reform — not such as we’re likely to see from this Congress or this president — would ideally end all deductions and cut everyone’s tax rates. A middle ground would be to lower the maximum deductible mortgage debt and fix everyone’s deduction percentage — not just for real estate but for all deductions — at the lowest of the tax brackets. But two of Washington’s most potent lobbies, real estate and charities, don’t intend to let that happen.

Speaking of tax reform, how long has it been since Florida had one?

Forty-five years.

Gov. Reubin Askew, elected in 1970 on a promise to make Florida’s consumption-heavy tax code fairer by taxing corporate income, pushed the 1971 Legislature to pass the necessary constitutional amendment and got the voters to ratify it, with 70 percent in favor, in a special election.

At his insistence, the 1972 Legislature used part of the new revenue to remove the existing sales tax from household utility bills and most residential rentals.

That was the last time Florida did anything for renters.

House Speaker Richard Corcoran‘s pending constitutional amendment would increase the existing $50,000 homestead tax exemption for every qualifying residence assessed at between $100,000 and $125,000 or more. The exemption would cancel up to another $25,000 of taxable value. That this applies only to county, city and special district taxes and not to school taxes doesn’t make it fair. The Senate’s staff estimated that it would cut nearly $795 million from affected budgets by fiscal 2020, assuming tax rates stay the same.

So to avoid closing fire stations, parks, libraries and other attributes of a modern functional modern society, local governments would have to get that money back from somewhere. That somewhere will likely be commercial property and, yes, those oft-forgotten citizens, the renters. You don’t think their landlords will eat the tax increases, do you?

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Martin Dyckman is a retired associate editor of the Tampa Bay Times. He lives in Asheville, North Carolina.