The Tax Policy Center (TPC), a joint center of the Urban Institute and the Brookings Institution, completed a new analysis of the United for Homes’ (UFH) proposal to reform the mortgage interest deduction (MID). UFH proposes to convert the MID to a tax credit and reduce the amount of mortgage eligible for a tax benefit from the current $1 million to $500,000. TPC estimates that these two modest changes would raise $241 billion over ten years for affordable housing programs and provide a tax benefit to 15 million additional homeowners with a mortgage who currently do not benefit from the MID.
Lower income homeowners benefit less from the current MID than higher income homeowners because lower income homeowners are less likely to itemize deductions on their federal tax returns and because even those who do itemize have lower tax rates that reduce the value of their deductions. The average annual benefit to homeowners with incomes over $1 million who take MID is $8,020, while the average benefit to homeowners earning between $50,000 and $75,000 is $730 per year.
By converting the MID to a 15% nonrefundable tax credit for all mortgage holders, 15 million additional homeowners would receive a benefit from their mortgage interest, more than 65% of whom have incomes less than $100,000. The average benefit for the $1 million earner would decline to $2,470, making the distribution of the tax benefit more equitable.
The report also examined the impact of the UFH’s MID reform proposal by state. A higher than average proportion of taxpayers in low-housing-cost, low-tax states would see a tax cut because a higher proportion of homeowners in these states do not currently benefit from the MID. A lower than average proportion of taxpayers in high-housing-cost, high-tax states would see a tax reduction and a higher than average proportion would see a tax increase.
Effects of Reforms of the Home Mortgage Interest Deduction by Income Group and by State (2016) is available at http://tpc.io/2h6Yjim