[PEN-L:11490] Re: Home Mortgage Deduction

[George McCarthy <mccarthy@xxxxxxxx>]

The home mortgage interest deduction has several negative aspects, two of
the main problems are:

First, it promotes urban sprawl and the decline of the inner city.  This
is due to the fact that it is cost effective to be highly indebted in
housing.  When people desire new amenities (like large yards or bigger
houses) it makes sense to purchase new housing rather than upgrade
existing housing.  Further, as housing ages and the cost of upkeep
increases, it influences the decision to abandon rather than improve the
building.

Second, it is invisible housing policy which benefits upper income people
disproportionately--especially since the tax reforms of the late 1980s.
If we consider it a part of federal housing policy, combined with the
property tax deduction and deferred capital gains it is three to four
times larger than the entire HUD budget.  More than 70% of the benefits
accrue to families with income greater than $75000.  Oddly, when
discussion of national housing policy takes place, we ignore the 100
billion dollars that we forego in tax revenue in the three programs.  It's
just more welfare for the wealthy, and it's considered tax policy rather
than housing policy.

The bottom line is that both federal and state tax codes are non-neutral
with regard to spatial and financial aspects of housing.  I have a paper
that is in the late stages of editing for submission to a journal about
the equity and efficiency issues of the mortgage interest deduction
(hopefully ready by early fall) if anyone is interested.

Cheers,

George McCarthy
Levy Economics Institute