The analysis found that both of the Obama administration’s proposals for modifying the MID would result in greater reduction in after-tax income for those in higher tax brackets versus lower-income taxpayers. However, lowering the MID to 28% of interest paid would raise taxes for only the highest income taxpayers, who typically fall into the 33% or 35% interest rate brackets, and would have no effect on after-tax income for those in the bottom four income quintiles.
All of the four author-proposed options for modifying the MID would benefit the bottom 80% of tax filers, while reducing the benefits to those in the top income quintile. Higher income taxpayers would lose the most after-tax income from the 17% refundable tax credit and lose the least under the 20% non-refundable tax credit. While the third author-defined modification, the non-refundable tax credit on the first $2,030 of interest paid, would also benefit taxpayers in the bottom four quintiles, it would offer the fourth quintile, those in the second highest income category, the greatest increase in after-tax income. This group has enough liability to use all or most of the credit and would gain from the higher subsidy rate. Those in the lower income quintiles also stand to gain, but it is less likely they will have sufficient tax liability to claim the whole credit. Those in the highest income category as a group are more likely to receive greater benefit from the current deduction, as the tax benefit they receive is likely to exceed $2,030.
Using data from the American Community Survey, the effects were further explored by race, ethnicity, and geographical location. While both eliminating the MID and limiting the value of the MID to 28% would raise taxes for a larger share of whites and Asians than blacks and Hispanics (the four racial groups considered in this report), limiting the value of the deduction would raise taxes for far fewer blacks and Hispanics. In addition, enacting any of the proposed credit options would benefit low and middle-income groups, blacks and Hispanics, and those residing outside of metropolitan regions and metro citizens. In addition, redistribution of the MID benefits would occur most rapidly with refundable credits rather than non-refundable credits.
The authors conclude with a call for more broadly based mortgage interest subsidies or credits for first-time home buyers that would increase homeownership rates at the same or lower fiscal cost.
The 2010 report, Reforming the Mortgage Interest Deduction, is available at: http://www.urban.org/UploadedPDF/412099- mortgage-deduction-reform.pdf
A new report estimating the effects of various reforms to the Mortgage Interest Deduction (MID), including those recently proposed by the Administration, by income level, race/ethnicity, and geographical area, concludes that modifications to the program could allow low to middle-income groups to gain from this policy. Currently, the MID benefits only taxpayers who itemize deductions, and provides larger benefits to those who occupy high-income tax brackets and own expensive homes.
Using the Tax Policy Center’s micro-simulation model, this study estimates the impacts for 2012 of eliminating the MID and limiting the value of the deduction to 28%, as have been proposed in recent budgets by the Obama administration. It also offers four author-defined modifications that would cost the same or less in budget terms than the existing deduction: a non-refundable tax credit (a credit available up to the amount of one’s positive federal income liability) equal to 20% of all mortgage interest paid; a 17% refundable tax credit (a credit that can reduce a taxpayer’s tax liability below zero) for all interest paid; a non-refundable tax credit for 100% of the first $2,030 of interest paid; and a 100% refundable tax credit on the first $1,490 of interest paid.