Those who argue for retaining the deductibility of home mortgage interest payments from the federal income tax overstate both its importance in encouraging home ownership and its effect on housing prices.

Housing prices generally rise or fall with changes in gross domestic product and personal income. An increase in personal income raises the demand for housing, increasing the value and selling prices of existing homes and the demand for new home construction.

Less than 25 percent of all income tax filers in 1991 claimed a deduction for mortgage interest. Since mortgage interest is deducted from income, the value of the deduction increases with the income of the filer. Thus most of the benefit of the deduction goes to higher income taxpayers.

• For those filers with incomes of $20,000 to $30,000 per year, the average tax saving is $785; for those making $30,000 to $40,000, the saving is $849; and for those making $40,000 to $50,000, it is $1,704.

• Those taxpayers in the $50,000 to $100,000 range save $2,164 on average, while those making more than $100,000 per year save an average of $5,581.

If tax rates were lowered, say by a flat tax, the value of the deduction would fall for higher-income taxpayers along with their tax rates. But interest rates would also fall, since interest income would no longer be taxed. Mortgage payments would therefore be lower or fixed-rate mortgages could be refinanced to take advantage of the lower rates.

Source: Rebecca S. Schaefer, "The Mortgage Interest Deduction: A Home for Special Interests," Issues and Answers, August 17, 1995, Citizens for a Sound Economy Foundation, 1250 H Street, NW, Suite 700, Washington, DC 20005, (202) 783-3870.

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