The National Association of Home Builders (NAHB) announced on Sunday that they would oppose the tax reform plan amid reports that it gets rid of the mortgage interest deduction (MID). The NAHB has previously claimed that removing the deduction will reduce incentives for individuals to purchase homes, thereby resulting in less of a market for new homebuilding. However, one industry’s desire to maintain a favorable tax credit is hardly a good reason to derail comprehensive tax reform, and Congress should not allow it to.
The MID is beloved by the home-building industry because it drives up prices for homes. Because of the MID, some potential homebuyers are willing to pay a higher price. As a result, prices increase to accommodate the greater demand. As some have pointed out, this is not beneficial for the economy, it is rent-seeking behavior—the economy as a whole does not grow, just the amount of money that the home-building industry makes.
Worse is the distributional impact of the MID. The Tax Policy Center found that 80 percent of the benefits of the MID flow to homeowners with a household income over $125,000. Most lower-income Americans claim the standard deduction rather than itemizing, and even fewer would itemize their deductions with the doubled standard deduction included in the tax reform package. Therefore, the vast majority of Americans, especially lower-income Americans, do not receive any benefit from the MID.
At the same time, all Americans who wish to buy a home are harmed by the effects of the deduction. Home prices are inflated, but only some Americans receive a tax deduction to help defray those increased costs. For households making above $200,000 a year, the average benefit from the MID is $1,784 a year in tax savings. On the other hand, for households earning $65,000 a year, the deduction generally yields less than $200 in tax savings. The result is a system where wealthy Americans are receiving a tax break that causes home prices to be more expensive.
While it is understandable why NAHB would wish to preserve the MID for its own economic interest, Congress needs to keep in mind its broader goal of fixing the tax code and providing broad-based, pro-growth tax reform. If the NAHB is only interested in preserving tax breaks that benefit themselves and the rich, then they are not a viable partner for tax reform anyway. After all, appeasing various special interests is the reason that our tax code is so desperately in need of reform in the first place.
Reporting about the content of the tax reform plan previously indicated that there would be some sort of modified tax credit for home ownership, perhaps consolidating a state and local property tax deduction and some limited version of the mortgage interest deduction. This would have raised some revenue to devote to driving down rates and making other pro-growth changes, but not nearly as much as outright killing the deductions. Still, given the precarious nature of tax reform, one can see why such a compromise was pursued.
But this compromise only makes sense if home builders, realtors, and other housing interests end up supporting a final tax reform package. Given that NAHB has indicated it will not only not support the plan as currently structured, but in fact spend large sums of money opposing it, Congress might as well just kill the MID outright. There’s no sense compromising if the parties with which you’re compromising aren’t going to support the final bill.
Eliminating the MID entirely would generate some $700 billion in revenue over the coming decade that Congressional leadership could use to further reduce rates, expand the scope of full expensing for business investments, or expand the standard deduction to better protect lower-income Americans. If the housing special interests aren’t supporting tax reform, any of those would be a better use of precious time and effort.