Many advocates of rental housing argue about the ultimate value of the mortgage interest deduction (MID)—questioning whether it really does encourage homeownership, or is just another break for the wealthiest Americans.
The government loses about $70 billion in revenue a year due to the MID, according to the Terwilliger Foundation for Housing America’s Families--and that “phantom” money is nothing to sneeze at.
Questioning the MID’s value is the first step toward a more balanced federal housing policy, and for that, the Terwilliger Center is fighting the good fight. At a time when our nation is staring down the barrel of a housing affordability crisis, it would seem that lost $70 billion should be reconsidered.
More than three-quarters of the MID’s benefits go to households earning more than $100,000 a year—and nearly the rest of those benefits accrue to those earning $200,000 or more, according to the Terwilliger Foundation.
Do families with that kind of income really need incentives to buy a home? Has the MID actually affected the homeownership rate in this country in any meaningful way? The rate rises and falls, the MID remains.
The National Low Income Housing Coalition and United for Homes has launched a campaign proposing to modify the MID by reducing the size of a mortgage eligible for a tax break to $500,000, and to convert the deduction to a 15% non-refundable tax credit.
But that sounds overly complex. What I don’t understand about the anti-MID argument is why it has to be an overhaul—why can’t we use a scalpel rather than an ax?
I would argue the MID does have tangible benefits—as a middle-class homeowner, I was a big fan—even as it costs us as a nation $70 billion annually. My thesis is: Why can’t a portion of the MID be peeled back and channeled into rental housing programs?
Just 50 Basis Points
Why can’t we let homeowners take, say, 97.25% of the deduction instead, leaving about $1.75 billion to play with for rental housing production? Or maybe a more modest proposal would be to let homeowners take 99% of the deduction—and channel that lost 1% in revenue—still a healthy $700 million—into rental housing.
Let’s go a step further—let homeowners take 99.5% of the deduction, and multifamily would still receive $350 million annually.
Imagine what that $350 million could do—the affordable industry was overjoyed when the GSEs finally made their first contributions to the National Housing Trust Fund in March to the tune of $186 million earlier this year.
This 50 basis point, proposal seems like an easy compromise—but in Congress, there’s really no such thing, especially given the fact that homeowners show up to the voting booths more than renters do.
But it would be a cost-neutral way of reflecting today’s new normal as the buy vs. rent landscape slowly shifts under our feet. The problem is, it’s almost too simple an idea to survive.
The way the sausage gets made in DC seems to be: you feed the grinder some common-sense, which then travels through a Rube Goldberg-like labyrinth of earmarks and hearings, and out comes sound, fury … and little else.
The MID is wildly popular with the electorate and there’s no sense in mangling it just because its effects on encouraging homeownership—or helping lower-income families—are difficult or nearly impossible to quantify.
Instead, the affordable rental industry should view it as a vehicle, an opportunity, coat-tails to gently ride on. If we could peel back just a tiny portion of the MID for affordable rental housing production, while homeowners still enjoy a 99.5% deduction, we may just have some common sense “reform” in sight.
If common sense had currency in Congress, that is.