Urbanism doesn’t get a lot of breaking news (that is, unless Eric Fidler’s prediction pans out), but this might be an exception: the WSJ is reporting that Obama’s (bipartisan?) deficit commission is considering cutting the mortgage-interest tax deduction. The reports are all very speculative, but it looks like they’re definitely not considering eliminating the tax break entirely. While most libertarians have advocated eliminating the tax break (and in fact all tax breaks) completely and adjusting the general tax rates to make the measure revenue-neutral, it looks like this (along with cuts to the child tax credit, among others) is a cost-saving measure.
As I discussed earlier today, the tax credit is just one of many highly regressive government advantageous to wealthy homeowners – the vast majority of Americans don’t even itemize their tax returns, and therefore don’t benefit at all from the tax break. Still, in spite of its regressiveness, it’s enormously popular among voters.
Leaving aside considerations of whether the savings should be used to pay down the deficit or to lower marginal rates, any move to limit this deduction would be a good thing for urbanism. While the American ideal of the homeowner involved in a positive way in their community and schools is prevalent, I fear that the greater effect of increasing homeownership above the market equilibrium is to encourage NIMBYism by making people look at their home, rather than their wider community, as their biggest asset. Furthermore, it puts people in the awkward position of desiring a rise in cost for one of life’s most essential needs, which clearly played a large role in the policies that led up to the subprime crash.
While this proposed change is certain to encounter fierce resistance from America’s real estate industry and wealthy, entrenched suburban interests, it is only a small step to correcting America’s pro-suburban bias. Economists appear to agree that the tax credit does little to actually encourage homeownership (here’s Ed Glaeser), and completely doing away with the deduction doesn’t even appear to be an option, so it should be emphasized that the effects of the proposed reform will probably be minor.