NCPA - National Center for Policy Analysis

Why We Should Limit the Home Mortgage Interest Deduction

March 1, 2013

The home mortgage interest deduction (MID) allows homeowners to deduct interest paid on up to $1 million on mortgage debt and $100,000 on home equity loans. However, the current tax system does not tax homeowners on imputed rent, which is the owner-occupied household's cost of obtaining the same services from a rental property. Because the current tax system fails to tax imputed rent, it leads to a tax advantage that could be fixed by replacing the MID with a 15 percent refundable credit, says Alan Viard, a resident scholar at American Enterprise Institute.

  • The MID is intended to increase homeownership by reducing the direct costs to homebuyers.
  • The Department of Treasury listed the mortgage deduction as a $111 billion dollar tax expenditure, and the failure to tax imputed rent minus mortgage interest as a $59 billion tax expenditure for fiscal 2014.
  • The MID offers the most benefit to taxpayers in the highest brackets, those with the largest homes and taxpayers who itemize their deductions as opposed to taking standard deductions.

The current tax systems reduces the cost of investing in owner-occupied housing by up to 40 percent for the highest-income households, which shifts resources away from business capital toward housing construction.

  • Numerous plans from the President's Advisory Panel on Federal Tax Reform, the Bipartisan Policy Center and the Simpson-Bowles tax reform have proposed eliminating the MID in favor of a refundable credit with a lower upper limit on the size of the homeowner's mortgage debt.
  • Viard calls for a 15 percent refundable credit and a $300,000 eligibility limit on mortgages.
  • The $300,000 is close to the mean new-home sales price of $304,000.

Because imputed rent is politically challenging and administratively difficult to collect, the 15 percent refundable credit limits the scope of the MID. Over 10 years, this proposal would raise an estimated $300 billion in revenue. Most of the revenue would come from higher-income taxpayers who would no longer be incentivized to build large houses.

By implementing this proposal, the tax incentive for homeownership would remain in place while targeting more effectively and equitably those who need the aid the most.

Source: Alan Viard, "Proposal 8: Replacing the Home Mortgage Interest Deduction," The Hamilton Project at the Brookings Institution, February 26, 2013.


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