Mortgage deduction alternative emerges in tax reform talks
WASHINGTON — Some housing industry groups are warming to a tax-reform alternative to the mortgage interest deduction that they say could help more Americans benefit from housing-related subsidies.
The GOP tax blueprint released last month drew fire from housing groups because it would effectively reduce the use of the mortgage interest deduction by doubling the standard deduction. But some have changed their tune and are exploring ways to trade the mortgage interest deduction for a housing tax credit.
The plan that was released last month by Trump administration officials and congressional leaders would effectively make itemizing deductions less appealing for the middle class, which would opt for a higher standard deduction.
Some housing groups now say the mortgage deduction could benefit mostly high earners with expensive homes, while a higher standard deduction combined with a housing tax credit could spread the subsidy to more taxpayers. Yet discussions around adding a housing tax credit to the mix are still preliminary.
“We looked at the money that would be funneling into the economy and our belief is that under the plan what is left of the mortgage interest deduction is geared at such high-income taxpayers that it’s not really a very effective means of either promoting homeownership,” said Jerry Howard, chief executive officer at the National Association of Homebuilders.
“Although the [GOP] plan doesn’t touch the mortgage interest deduction at all, it does ultimately dilute the effectiveness of the mortgage interest deduction by creating a tax system where only the wealthiest people would be left as itemizers,” Howard said.
He said an alternative plan would be to create a housing subsidy that could be used by itemizers as well as people who take advantage of the larger standard deduction.
Other groups are exploring alternatives to the mortgage deduction as well, although none besides the NAHB have gone public about it. An industry source at another housing-related trade association said the group is willing to discuss the housing tax credit alternative but would oppose any proposal that would significantly reduce housing tax incentives.
"We are open to seeing if there is a more efficient way to target the subsidy towards low and middle income borrowers," said the source.
While housing groups ultimately want the largest subsidy possible to promote homeownership, not all the trade associations are in lockstep about how to achieve that. The National Association of Realtors, for example, has been particularly critical of the initial GOP tax blueprint and appears wary of endorsing a mortgage interest deduction alternative this early in the process.
The tax plan writing process is still in early days. The Senate passed a budget resolution late Thursday that the House is expected to accept. The resolution will allow the tax writing committees in the House and Senate to start working in earnest.
House Ways and Means Chairman Kevin Brady, R-Texas, said on Wednesday that adjusting the mortgage interest deduction is on the table.
“We are exploring the home mortgage deduction and charitable [deductions] and looking at ways perhaps we could extend it across the economy, not just for those who itemize it,” Brady said at an event at Rice University in Houston. “Perhaps allow it be used for all phases of homeownership.”
While the mechanics of a housing tax credit haven’t been hashed out, a housing tax credit may not ultimately be equal in aggregate dollars to what would be saved using the mortgage interest deduction. But it could be used by more people.
“We believe the idea of a homeownership tax credit would be much more effective for the middle class. It would actually spur interest and investment in homeownership," said Howard. “We take that in conjunction with the increase in the standard deduction and lower tax rates — we think you have a tax code that both reduces the burden on the taxpayer and also still places a premium on homeownership.”