Housing & the Mortgage Interest Deduction

Abstract:     
The deduction for qualified residence interest (QRI) is the second largest individual tax expenditure, after the exclusion for employer provided health insurance. While homeownership has long been viewed as a social good, the QRI deduction has faced criticism. Commentators have argued that it is not consistent with the structure of the income tax system; it is economically inefficient, skewing investment towards private residences; it is inequitable, discriminating against low income people (a group that may disproportionately include people of color), and certain religious minorities; and it is environmentally unsound, encouraging sprawl, excessive energy use, and inefficient transportation choices. In late 2008, the entire world reeled from a global economic crisis, which started with a housing bubble inflated by excessive debt facilitated by subprime mortgages and spread around the economy by mortgage backed securities.

Assuming that homeownership provides useful societal benefits, this chapter will explore how the tax system could create incentives for homeownership while avoiding the problems of the QRI deduction. The chapter will examine options including adding a homeownership benefit to the standard deduction, creating a refundable housing credit, providing a deduction for contributions to a housing savings account, and including a shelter credit available for renters and homeowners alike. The chapter will also address whether the housing benefit should be linked to debt financing. The ideal benefit would be equitably distributed, would not unduly influence housing prices, would not encourage excessive debt, and would respect environmental as well as social goals.

Number of Pages in PDF File: 30

Keywords: tax policy, deductions, mortgage interest, housing

JEL Classification: K34, I31, J18, D31, D36, H24, J11, R21

Accepted Paper Series