New estimates of the budget size of federal tax expenditures have been published. And due to policy and economic changes over the past year, the estimated size of the mortgage interest deduction is down considerably.
The official scorekeeper for tax expenditure and revenue estimates is the Congressional Joint Committee on Taxation (JCT). Every year the JCT updates its estimates of the budget size of various tax policy items based on both changes to taw law and the underlying economy.
The tax expenditure for the mortgage interest deduction (MID) has been falling over the last few years, ironically during a period in which some have eyed the deduction as the source of potential tax hikes. Take the evolving estimate for the MID for 2013 as an example.
In late 2010, the JCT had the 2013 estimate for the MID at $98.5 billion.
In early 2012, the JCT revised down the 2013 estimate to $89.6 billion.
For the 2013 publication, JCT has the MID estimate for this year down again to — $69.7 billion. In fact, the current JCT numbers have the 2017 MID tax expenditure estimate at $83.4 billion, lower than even the estimate for 2013 published just last year.
These changing estimates are not a criticism of the JCT. Joint Tax is the gold standard for tax policy numbers.
Instead, this history reflects updated economic data and changes in tax law passed by Congress. In particular, lower interest rates, increasing numbers of refinancings, a lower homeownership rate, and the fiscal cliff deal all have worked to lower the budget size of the MID.
For example, the fiscal cliff legislation enacted at the beginning of 2013 permanently extended most of the 2001/2003 income tax rate structure, keeping rates lower for middle class families, who collect most of the benefits of the MID. Because the tax value of a deduction is based on a taxpayer’s marginal rate, prior tax expenditure estimates used the present law baseline, which assumed – prior to the fiscal cliff deal – that income tax rates were going up in 2013. This artificially boosted the tax expenditure values in future years, creating an unrealistic impression of the size of itemized deductions like the MID.
The new JCT estimates clarify this issue, which is one of the benefits to economists of the post-fiscal cliff permanent tax rate structure – no more debates and confusion about present law vs. present policy baselines.
More importantly, the new JCT numbers illustrate a point that housing advocates have made about proposals to raise taxes on those who benefit from the MID: there’s less money there than is claimed, even putting aside any economic consequences that would result from changes to long-standing policy.
This is even more relevant when recalling the fact that tax expenditure estimates are not revenue estimates. Unlike tax expenditure estimates, revenue estimates measure the tax receipts that might be collected from changes in tax law. These estimates reflect changes in taxpayer behavior, and for proposals that involve tax increases, revenue estimates will typically be even smaller than tax expenditure estimates.