Published in Housing Wire
The U.S. has encouraged homeownership throughout most of its history, because it contributes to stable communities, supports our nation’s economy, and helps families build wealth. Franklin Delano Roosevelt said it best when he said, “A nation of homeowners is unconquerable.” Undoubtedly, lawmakers back then understood the value of homeownership.
For many families, owning a home means gaining a foothold into the middle class, and tax benefits like the mortgage interest deduction (MID) help those families become and remain home owners.
Recent debates over tax reform and revenues have speculated about targeting the MID for change and have caused widespread rumors and myths about the vital tax benefit for homeowners and its critical role in the stability of the U.S. housing market and economy.
There is no doubt that our nation is facing tough economic challenges, but it’s ridiculous to say that the MID is suddenly part of the problem; the deduction has been part of the federal tax code for nearly 100 years and generations of families have counted on it.
Any changes to the MID could also place the housing market and the broader economy under stress. Progress has only recently been made in bringing stability to the housing market and changes to the MID could tip the economy into another recession, resulting in further job losses for the country.
The MID also makes a real difference to hard-working middle class American families. People don’t usually buy homes because of the MID, instead they buy homes because it’s where they make memories, build their futures, and feel comfortable and secure. However, the MID helps facilitate home ownership by reducing the carrying costs of owning a home.
Normally, nearly nine out of 10 home buyers must borrow money to buy a home. Tax benefits like the MID help people who don’t have hundreds of thousands of dollars in savings to buy a home by helping them begin building their future through homeownership. It’s especially important to middle- and lower income families, who primarily benefit from the tax incentive. In fact, 65 percent of families who claim the MID earn less than $100,000 per year.
The ability to deduct the interest paid on a mortgage can also mean significant savings at tax time. For example, a family who bought a home this year with a $200,000, 30-year, fixed-rate mortgage, assuming an interest rate of 4.5 percent, could save nearly $3,500 in federal taxes when they file next year. The money saved as a result of this benefit could be put into savings, applied toward college tuitions, or simply used to pay down other bills.
Few can argue that wealth accumulation is the foundation for a healthy middle class. The wealth of most middle-class American families is connected to their home since it has long been one of the best ways for individuals to build long-term wealth, providing both tax benefits and equity accumulation over time.
Millions of Americans saved for and bought their homes with the understanding that mortgage interest is tax-deductible, and many of them have steadily paid down their mortgages to build equity in their home. Eliminating or reducing the MID would destroy the hard-earned equity of millions of home owners, independent of their tax filing status. Destroying the wealth accumulation those families would effectively demolish the dreams they’ve worked hard to achieve such as college, retirement or starting a small business.
Reducing the MID would also be a de facto tax increase on America’s 75 million homeowners, who already pay 80 to 90 percent of U.S. federal income tax. This share could rise to 95 percent if the MID is eliminated.
Proposals to eliminate tax expenditures and lower tax rates would not necessarily reduce taxes for the middle class, and there is no guarantee reduced rates would remain in place in the future. Protecting the wealth of hard-working Americans is what’s really important. If the MID were reduced or eliminated, many middle class Americans would have lost a way to accumulate family wealth. We must not continue to worship at the altar of low tax rates if that means hurting American homeowners and families.
With the nation’s economy and the housing market recovery on fragile ground, legislators must focus first on doing no harm to homeowners and the housing market by maintaining current federal incentives to housing. Otherwise, millions of Americans will find it more difficult to achieve their goals of homeownership. And we’ve all worked too hard to get through the past few years to let that happen.
Gary Thomas is 2013 president of the National Association of Realtors®