Are we going to get rid of the mortgage interest deduction?

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Last week Shaun Donovan, who runs the Department of Housing and Urban Development, said that it might make sense to modify the mortgage interest tax deduction. Sacrilege! Giving people a tax break for buying a house is one of the great middle class subsidies. Donovan knew he was on shaky ground when he said it, and did plenty to hedge. According to the WSJ:

He also made clear that the Obama administration isn’t actively considering, much less endorsing, such a step, which could affect millions of homeowners… Pressed for more details, Donovan again made clear that this wasn’t an active conversation inside the administration. “We’re not actively looking at this. It’s not something that we have a policy group on or anything at this point,” he said. “I don’t want to get into the details of discussions that aren’t happening.”

Too bad. Because we shouldn’t only look at getting rid of the mortgage interest deduction—we should actually do it.

Each year, about 40 million tax payers claim the mortgage interest deduction. Congress’s Joint Committee on Taxation estimates that between 2009 and 2013, the federal government will miss out on about $600 billion in revenue as a result. In 2009, the tax break cost the government $80 billion—which could have paid for more than 2% of all federal spending.

Drumming up revenue is all well and good, but a bigger reason to get rid of the tax break is that it makes buying a house artificially cheap, and it encourages people to take on more debt, since the tax break comes from the loan and not, say, the amount of equity held in the house.

In a recent op-ed in the Boston Globe, Harvard economist Edward Glaeser made a few other compelling arguments. First, that the mortgage deduction isn’t an evenly distributed tax break:

The mortgage interest deduction is also extremely regressive. Economists James Poterba and Todd Sinai estimate that the deduction typically saves $523 per year in taxes for home-owning families earning between $40,000 and $75,000, and $5,459 per year for families earning more than $250,000.

Indeed, Donovan pointed out that many lower income home owners don’t take the deduction at all because they don’t itemize their taxes since the standard deduction is worth more to them.

Also, as Glaeser points out in his Globe piece, the tax break has contributed to the proclivity to buy larger houses, since you get a bigger tax break if you take out a bigger loan:

Americans, even poor Americans, have almost twice as much living space as the average resident of France or Germany. According to the Residential Energy Consumption Survey, homes with between 2,500 and 3,000 square feet of heated living space use 41 percent more electricity than homes with between 1,500 and 2,000 square feet of space. In an age of global warming, why should we subsidize the greater energy use inherent in larger homes?

On the other side of the argument, we have the nation’s real estate agents, mortgage brokers and home builders. A nice little lobbying block they’ve got going. Not to mention those 40 million tax payers (i.e., voters) who currently receive the deduction. It would be a fantastic political feat to get rid of a tax break with such a following—especially at a time when the housing industry is limping along.

At this point, I’m happy that we’re even talking about it.