Fundamental Tax Reform: Options for the Mortgage Interest Deduction (CRS Report for Congress)
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| Release Date |
Revised Jan. 8, 2008 |
| Report Number |
RL33025 |
| Report Type |
Report |
| Authors |
Pamela J. Jackson, Government and Finance Division |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
The mortgage interest deduction, which is one of the largest sources of federal tax revenue loss with an estimated annual cost of $72 billion, is intended to encourage homeownership. Empirical studies suggest that the mortgage interest deduction subsidizes mortgage lending, which has more impact on housing consumption than homeownership rates. Other homeownership subsidies, like down-payment assistance programs, are proven to be more effective at increasing homeownership among lower-income families and are less expensive than the mortgage interest deduction.
A recent enhancement to the mortgage interest deduction was enacted in the Tax Relief and Health Care Act of 2006 (P.L. 109-432),which temporarily allowed, for tax year 2007, mortgage insurance premiums paid for a personal residence to be tax deductible as mortgage interest. The Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648; P.L. 110-142) extended that provision through the end of 2010.
Early in the 109th Congress, tax reform was a major legislative issue. President Bush appointed a bipartisan panel to study the federal tax code and to propose options to reform the code. The panel produced a report in the fall of 2005 that included a proposal to change the mortgage interest deduction. Legislation for fundamental tax reform was introduced, and some bills proposed to change the tax base such that income tax credits and deductions, like the mortgage interest deduction, would have been eliminated. Late in the first session of the 110th Congress, House Ways and Means Committee Chairman Rangel indicated that fundamental tax reform might still be considered in the 110th Congress.
There are many possible options to alter the mortgage interest deduction. If the deduction were eliminated as a result of fundamental tax reform, the resulting effects would depend on a variety of variables, including the nature of tax reform, the resulting changes in the tax base and tax rates, changes in interest rates, and other economic variables. If the deduction were eliminated without other tax policy changes, federal income tax revenues would increase, the tax base could be broadened, and the federal budget deficit could be reduced.
Modifications to the mortgage interest deduction could take any one of several approaches. Congress could choose to allow the deduction for only one residence and/or to reduce the allowable principal debt, which is currently $1 million. These changes would reduce the amount of tax revenue loss associated with the provision. Congress could choose to improve equity by allowing more low-income households to claim mortgage interest, either as an above-the-line deduction or as a tax credit. Finally, the mortgage interest deduction could remain unaltered.
This report, which will be updated to reflect legislative developments, describes the deduction for home mortgage interest, provides economic analysis, and concludes with possible changes to the mortgage interest deduction and the potential impacts of those changes.
