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Interest Deduction Popular But Unnecessary

Economists agree deduction does little 4 for homeownership rates.

April 25, 2011

By JULIE DELCOUR Tulsa World - McClatchy-Tribune Information Services

While the mortgage interest deduction is cherished by millions of U.S. homeowners, economists say that the deduction does nothing for home ownership rates.

The AT&T commercial shows a guy sitting in a restaurant booth arguing on his iPhone about the date of a particular event. As the debate rages he secretly surfs the Internet to nail down the actual date. Suddenly he discovers, to his deep chagrin, that he's dead wrong.

Rather than admit defeat, he yells into the phone, "Gotta go. I'll call you back, kitchen's on fire."

I know just how he feels, and so do all those homeowners who count on the beloved, nearly 100-year-old mortgage interest deduction to lessen their tax burden.

No matter how many arguments are made to ax the deduction -- by presidents, commissions, policy wonks, academics, congressmen, writers or bureaucrats -- most Americans are not about to admit that we're wrong about keeping the deduction.

We love it like a child because sometimes it is a more lovable deduction -- or a more lucrative one -- than the kids who eventually age off our tax returns. That 30-year mortgage, which could be refinanced to savor it longer, keeps on ticking like an old Timex watch. The deduction might not be as hefty a subsidy at, say, 26, as it was at 6, when the house payment included mostly interest, but it still helps offset the tax burden, right?

We love the deduction because our parents loved it and our grandparents loved it. It's in the American homeowner's DNA to expect this perk of homeownership. Sure, the deduction might favor the wealthy but it also helps the non-wealthy. Spare us the sanctimonious sermon that it rewards debt.

The deduction is about all that the deductiondle class has left. Talk about taking it away to bring down the deficit, and homeowners turn into Rottweilers.

Five years ago, George W. Bush tested the waters on cutting the deduction. New York Times Magazine contributor Roger Lowenstein followed up with a maddeningly persuasive 5,000-word piece about how this needed to be done. He also tried to debunk some folk legends associated with it.

What economists say

"Economists don't agree on much but they do agree on this: the interest deduction doesn't do a thing for homeownership rates," Lowenstein said. "If you eliminated the deduction tomorrow, America would have the same number of homeowners, the same social networks, the same number of gardens."

From 1960 to 2006, the rate of homeownership only rose from 60 percent to 67 percent, not exactly a rousing endorsement for the deduction. Yet, if you ask homeowners why they bought they'll invariably insist that the deduction mattered.

Lowenstein also found that 70 percent of tax filers don't get any benefit from the deduction at all. "OK, many of them are renters," he admitted. "But even among homeowners, only about half claim the deduction. And, for 37 million individuals and couples who do, the rewards, at least on average, are surprisingly modest, just under $2,000."

Individually, that amount might not be a big deal, he said. Cumulatively it is a huge deal, especially to a Congress that would sooner bomb Great Britain than raise taxes to reduce the deficit.

So, lawmakers covetously eye the deduction, which amounts to at least $113 billion a year in lost revenues.

Most of us would like to do our part in bringing down the $14.3 trillion deficit. But many of us also would vote against anyone who kills the deduction. Nothing personal; it's business. Historically speaking, favoring such a proposition is politically risky.

Last Sunday, U.S. Sen. Tom Coburn, R-Okla., told Fox News, "Americans need to know that lawmakers in Washington are willing to lose elections to do what is best for the country. Everything has to be on the table."


Get out the pitchforks

The deduction did not cross Coburn's lips, but that was not the case for Sen. Mark Warner, R-Va., who appeared on CBS' "Face the Nation" that same day. Both are part of the bipartisan "gang of six," a group of U.S. senators trying to develop a spending/deficit reduction plan. They realize that any proposal will make Americans left and right mad enough to pick up pitchforks.

"Charitable deductions, home mortgage deductions -- if we would cut back on some of those we could actually lower rates and still increase revenues," Warner said.

The National Commission on Fiscal Responsibility and Reform, empaneled by the president a year or so back, is one of those arm's-length groups that tackles tough issues that politicians don't want to touch themselves. In its final report, the panel favored eliminating common deductions such as the deduction. That report -- big surprise -- recently died a quick, painful death in congressional committee.

Some national economic analysts insist that Congress would never be so brazen as to repeal the mortgage deduction outright but it might do so in stages.

Economic observer Howard Gleckman estimates that a total deduction repeal wouldn't be that harsh -- the average tax bill would rise by $710. Those earning from $30,000 to $40,000 would pay an average of $70 more and those making more than $1 million would pay $4,000 more.

Taxpayers aren't buying it.

The latest USA Today/Gallup poll shows that Americans want to keep common income tax deductions intact -- 60 percent of those polled favored keeping the deduction even though only 43 percent claim the mortgage deduction. Homeowners even have the renters -- wannabe homeowners -- on their side. At least 70 percent of renters polled favored keeping the deduction.

Lucy and Charlie Brown

When government kills a deduction that's been around as long as the deduction, it essentially is creating a new tax. How, at this stage, do you start changing the rules of the game when people have based retirements, savings, household budgets, the size of their home, on a certain scenario? It's like Lucy grabbing the football away just as Charlie Brown is about to kick it.

Besides, deep-sixing the deduction has other ramifications. It would punish a housing market that's in chaos; it also would harm segments of the economy like the home-building industry, already on life support.

Years ago, Kevin Hassett of the American Enterprise Institute, told Lowenstein that the deduction isn't fair. "Our tax code says, 'Don't build a factory, build a mansion.' The (deduction)," Hassett sniffed, "is the perfect break for bobos in paradise."

We homeowners take offense; we don't consider ourselves "bobos" for defending the deduction. But I'll have to settle this later -- kitchen's on fire.

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