New Study Examines Tax Reform and the MID

A new macroeconomic analysis by the Tax Foundation should give tax policymakers pause about using the mortgage interest deduction (MID) as a way to pay for tax reform.

The Tax Foundation, a leading tax policy think tank that supports tax reform, used their macroeconomic model to examine the employment, GDP and other economic consequences of eliminating the MID to raise revenue in order to finance lower statutory tax rates.

The report’s findings are consistent with arguments NAHB has raised regarding other reform proposals, such as Simpson-Bowles, which failed to account for the behavioral effects in their revenue estimates:  

— On a static basis, the potential revenue that could be raised from MID repeal is much smaller than many tax analysts believe

 — Using a 2008 baseline of a tax benefit of $101 billion, the Tax Foundation economists find that repeal would raise only $39 billion for the Treasury

— NAHB has explained that this difference in expected tax collections is caused by taxpayer behavior, including reductions in homeownership and portfolio shifting, whereby taxpaying homeowners may sell, for example, low yield assets (bonds) and pay down mortgage debt, thus reducing the actual revenue collected

— The Tax Foundation found that eliminating the MID and using all the revenue to reduce individual income tax rates would reduce rates by 8.7% (percent, not percentage points, so 25% rate becomes 22.825%)

— However, the economic costs of doing away with the MID would result on net by lowering GDP $107 billion per year, thus harming the economy

The economic costs of MID repeal include delayed, deferred, or prevented homeownership, as well as wealth declines from housing price declines. The authors of the Tax Foundation research note:

 …the Tax Foundation model predicts that ending the deduction would cause some economic harm. Losing the deduction would push some people into higher tax brackets, and the people affected would respond to the higher marginal tax rates by working and investing less. In addition, the higher cost of home ownership would somewhat reduce the value of the owner-occupied housing stock, either through lower home prices or the building of smaller housing units over time

NAHB has estimated that every one percent decline in housing prices lowers aggregate household wealth by more than $180 billion. Thus, only a 6% price drop, well within the range previous research estimates of house price declines produced by MID repeal, would eliminate at least $1 trillion in household net worth. The report authors also note in regard to the substitution of the MID for 8.7% lower income tax rates:

 From a growth perspective, this is not an attractive trade.

The report does finds GDP benefits if MID repeal is tied to financing 100% business expensing and individual rate reductions, but such a change would represent a significant deviation in tax and housing policy and result in increasing taxes on individuals to lower taxes for corporations.

On net, the report is a useful illustration of the fact that housing is a form of investment, and as such increasing taxes on homeownership will have negative growth consequences, even if used to lower marginal income tax rates.

The Tax Foundation has also published a similiar analysis on the state and local property tax deduction.



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