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Eliminating Mortgage Interest Deduction Would Raise Taxes for Middle-Class Families

WASHINGTON, D.C. – January 31, 2011 – (RealEstateRama) — Eliminating the deductions for mortgage interest and real estate taxes would raise taxes disproportionately for middle-class households and make the tax system less progressive, according to a new study from the National Association of Home Builders (NAHB).The study also concludes that the benefits of these deductions are collected primarily by middle-class taxpayers, with incomes between $50,000 and $200,000, and that greater benefits are earned by larger households and families, such as those with children.

“Proposals to reduce or eliminate the mortgage interest deduction are short-sighted and would harm the economy and job creation at a time when housing is poised for recovery,” said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. “The deduction is the mainstay of our housing policies and tampering with it would break faith with the millions of families who rely upon it to meet their household expenses and with millions more who one day would like to be able to afford to own a home of their own.”

“Contrary to the claims of some economists, the benefits of the mortgage interest and real estate tax deductions are collected primarily by the middle class,” according to the study. “Of the total, 68 percent of the benefits of the mortgage interest deduction, and 77 percent of the real estate tax benefits, are claimed by those earning less than $200,000. These same taxpayers pay only 43 percent of all income taxes.”

The research estimates the tax benefit (or tax expenditure) collected by home owners from these deductions, while accounting for factors that would “claw back” the net benefits, such as the Alternative Minimum Tax and the standard deduction.

Using data from the nonpartisan Joint Committee on Taxation (JCT), the report shows the tax liability and mortgage interest deduction and real estate tax deduction benefits for five income groups. The report finds that the shares of the total benefits of the two housing deductions exceeded the shares of taxes paid for every income class except the last one, those earning $200,000 or more.

These data “demonstrate that the mortgage interest and real estate tax deductions make the U.S. tax system more progressive, not less, as is often claimed,” the report says.

The report adds that “for taxpayers with less than $200,000 in adjusted gross income (AGI), the average tax benefit of the mortgage interest deduction is equal to 1.76 percent of AGI. For taxpayers with more than $200,000 in AGI, it is equal to 1.5 percent. This is clearly indicative of a progressive tax benefit.”

The study also examines the relationship between housing tax benefits and household size and addresses the criticism that the mortgage interest deduction provides people with an incentive to purchase a larger, more expensive home.

“It is more likely the case that larger families demand larger homes, and the tax incentives help these families more to finance these homes with debt, particularly for first-time home buyers who may have less equity in housing,” the study says.

Using the IRS data from 2004, the study found that the average benefit of the mortgage interest deduction rose fairly steadily with the size of the household.

“These results are consistent with intuition,” the study says. “Larger households and families require larger homes. And larger homes require additional mortgage debt to finance, particularly for younger home buyers, who are or may be in the process of having children. These greater home finance costs imply larger deductions for mortgage interest and real estate taxes.”

The entire report – “Who Benefits From the Housing Tax Deductions?” – is available at