Expanding on my last post, the New York Times speaks more to the disparity of benefits for those that claim the Mortgage Interest Deduction (MID). The percentage of those claiming the deduction are clustered in areas that are more affluent with relatively high property values.
Read the full article:
A new report from the Pew Charitable Trusts reinforces what many economists have been saying for some time: the mortgage interest deduction primarily benefits high-income homeowners.
The report charts the geographic distribution of those using the deduction across and within the 50 states. The states with the largest percentages of tax filers claiming the deduction are clustered along the East and West Coasts, in more affluent areas with relatively high property values.
The illustration isn’t completely predictable, however, particularly when it comes to the varied usage within states. And those nuances could help inform the current debate in Washington over whether to shrink or even eliminate the interest deduction, which, at $72 billion in 2011, is the third-largest in terms of foregone tax revenue.
A minority of tax filers benefit from the deduction, primarily because it is restricted to those who itemize deductions on their federal income tax returns. According to the Tax Policy Center of the Urban and Brookings institutes, only about 30 percent of taxpayers itemize, rather than take the standard deduction.
The Pew report found that Maryland taxpayers take the greatest advantage of the mortgage deduction, with 37 percent having claimed it in 2010. Connecticut comes in a close second, at 34 percent. North Dakota and West Virginia taxpayers derive the least benefit, with claim rates of 15 percent.
One surprising finding is the presence of Colorado and Utah among the top six states for claim rates, especially compared with New York, which ranks 35th.
That seeming anomaly reflects the higher level of construction activity in Western states, said Michael Lea, the director of the Corky McMillin Center for Real Estate at San Diego State University. “People have been moving there and buying newer houses,” he said, “and those have been larger houses, in part because they get the benefit of the tax deduction.”
Shrinking the focus on claims to the metropolitan level, the New York area shows a claim rate just shy of 20 percent, considerably below the national average. Anne Stauffer, a project director at Pew, says the low average can be explained partly, but not completely, by the area’s high rental rate.
Ms. Stauffer outlined two ways in which altering the mortgage interest deduction could affect states. If their tax codes are directly linked to the mortgage interest deduction, any change in the deduction could affect state revenues. Also, economic activity within states could shift along with a revision that increases or decreases income taxes.
The real estate and building industries have opposed changes to the deduction, cautioning that it could set back the housing market recovery. In the estimation of Mr. Lea, the degree to which lowering the deduction would depress real estate prices in high-use areas would probably depend on how the change was administered.
“If it was phased in,” he said, “we would probably see some decline in house prices in the short run, but over time I think that the forces of supply and demand in those areas would dominate.”
Mr. Lea’s preference would be a much lower cap on the deduction than the current $1 million in mortgage debt.
“I would actually advocate going one step further and replacing it with a first-time home-buyer tax credit,” he added. “If your real intent is to stimulate homeownership, that’s a much better way.”