In general, I am opposed to just about any tax increase. However, the mortgage interest deduction is one of my least favorite tax breaks. First of all, it’s a regressive tax deduction that transfers wealth from renters and businesses to homeowners. Second, it causes home prices to rise relative to the value of similar rentals, causing conversions of rental properties to condos and other imbalances. Thus, many markets have had a net loss of rental housing stock.
As a result of this imbalance of demand related to ownership incentives, developers have less incentive to build for long-term holding since it is more profitable selling condos instead of rentals. Because condo developers will not be responsible for maintenance over the life-cycle of the property, they tend to care less about durability and energy-efficiency than construction cost. In the long run, the homeowner pays the added costs of the higher-maintenance, less-efficient home.
Repealing the deduction will be an uphill battle. Homeowners are a reliable voting block, so pandering to them usually pays off for politicians. Repealing the deduction would probably drive home values down further, so it will probably have to be tabled until the credit markets recover.
For more in-depth economic insight, read John Tammy’s article:
Repeal Housing’s Mortgage-Interest Deduction