DEFENDING THE DEDUCTIONS FOR TAXES AND MORTGAGE INTEREST

The Max and Dave “clean slate” approach to tax reform, which I wholeheartedly support, begins by eliminating all “tax expenditures”.  The new Tax Code begins “everything is taxable” and “nothing is deductible” and adds back only those “excepts” (exclusions, deductions, and credits) that are absolutely necessary.

A recent BUZZ installment referenced “Homeownership Tax Deductions, Credits and Exemptions” from REAL ESTATE METRO.  It listed the many “tax expenditures” related to home ownership.  Topping the list were the deductions for real estate taxes and mortgage interest.

The Office of Management and Budget reports that for 2012 the deduction for mortgage interest “cost” $87 Billion and the deduction for state and local taxes cost $33 Billion.

The TAX FOUNDATION’s “Case Studies” on eliminating tax expenditures said this about the “Property Tax Deduction for Owner-Occupied Housing” -

“Two criticisms are that it is mostly claimed by upper-income taxpayers, and that it softens people's opposition to high taxes and wasteful spending by local governments, because some of those taxes can be written off at the federal level.”  

And this about the “Mortgage Interest Deduction for Owner-Occupied Housing” -

“The chief criticisms are that it is mostly claimed by upper-income taxpayers, and that housing is given less punitive tax treatment than many other forms of saving or investment.”

Regarding the deduction for home mortgage interest, in a TWTP post from June of 2010 I noted –

“Howard Gleckman posed the question “Should We Dump the Home Mortgage Interest Deduction?” at TAXVOX, the blog of the Tax Policy Center.

Kay Bell added her two cents to Howard’s commentary in “Is It Time to Kill the Mortgage Interest tax Deduction” at DON'T MESS WITH TAXES.

A recent tweet led me to the article “Mortgage Deduction: America's Costliest Tax Break” By Jeanne Sahadi at CNNMoney.com from April.”

I support keeping the deduction for state and local income taxes, and real estate taxes and “acquisition debt” mortgage interest on a principal personal residence (owner-occupied housing).  But my reason is not to encourage home ownership. 

The Internal Revenue Code taxes Americans based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location. A family living in the northeast or California that has an income of $100,000-200,000 (apparently considered “upper-income taxpayers”) may be just getting by, while a similar family that resides in “middle America” lives like royalty on the same level of income. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.

It costs an awful lot to live in, for example, New York, certainly New Jersey, Connecticut, Massachusetts, and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.

Real estate and state and local income taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, and California. Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically “equalize” the tax burden.

I do believe that the itemized deduction for real estate taxes and mortgage interest on secondary personal residences and the itemized deduction for “home equity” mortgage interest (not used for “substantial” home improvement) should be eliminated.

I have never seen the issue of “geographic equalization” discussed anywhere else, and would like to hear from others on this issue.  Please comment on this post!

TTFN