Dump the Homeowner’s Exemption

Before you dismiss me as a crank, let me explain.

The homeowner’s tax exemption is bogus and we should be rid of it for a couple of reasons. For one, it is the opposite of progressive. The more expensive of a house you buy, the bigger your deduction. Which means rich people get far bigger deductions than do poorer home buyers. Second, it does not, in any way, help people buy a house. All it does is make realtors fees bigger, nothing else.

Consider this scenario. You are out house hunting and you looking at a number of houses you like that cost $180,000. But there is no homeowner’s interest tax deduction. Then, voila!, the government passes a law saying that there will now be such a deduction. “Wow, that is so cool,” you think. But what really happened is your realtor did a little math and figured out that you could now afford the monthly payments on a $200,000 house because of that deduction. Again, you thought, “Cool, we might just be able to buy a nicer house that we thought.” But when you go looking, you find that the houses you were looking at before, that were for $180,000, are now priced $200,000 because their realtors did a little math and explained that with the new law, people who could afford to buy a $180,000 house can now buy a $200,000 house. So, you got a $200,000 house, but it was not different from the $180,000 you could have gotten without the deduction.

Obviously this didn’t happen like this, but the same thing did happen. The only people to benefit were the house sellers who got a bump just after the law passed and then after the market “adjusted” (house prices are determined by what people are willing and able to pay, nothing else) the only people to benefit were realtors as their commissions were now based on artificially inflated prices. Oh, well, the bankers got a bump, too, as there was more interest on those larger loans, but once the adjustment took place, there was no more benefit. So, the federal government is subsidizing realtor commissions and not much else.

But, But, If . . .
Now, if we do decide to forego this deduction, I want all current mortgage holders to be grandfathered in, but new mortgage holders will not be. All new house sales will be depressed somewhat as the market adjusts, so people currently trying to sell would suffer a tad, but housing prices have been clobbered by the recession and another couple of percent aren’t going to matter much.

Also, tax tables will need to be adjusted to account for the newly vacated deductions. This isn’t exactly difficult, any actuary could do it.

In the future, it would be nice if policy makers were to look at the real impact of laws before cementing them in place. Would you have been for a federal subsidy of realtor commissions? No, but a homeowner interest deduction sounds good.

It would be cool to go back and look at who was lobbying for this law when it was passed. On Wikipedia it says “Prior to the Tax Reform Act of 1986 (TRA86), the interest on all personal loans (including credit card debt) was deductible. TRA86 eliminated that broad deduction, but created the narrower home mortgage interest deduction under the theory that it would encourage home ownership. A New York Times article notes that, in 1913, when interest deductions started, Congress “certainly wasn’t thinking of the interest deduction as a stepping-stone to middle-class homeownership, because the tax excluded the first $3,000 (or for married couples, $4,000) of income; less than 1 percent of the population earned more than that;” moreover, during that era, most people who purchased homes paid upfront rather than taking out a mortgage. Rather, the reason for the deduction was that in a nation of small proprietors, it was more difficult to separate business and personal expenses, and so it was simpler to just allow deduction of all interest.”

So, in 1913 the only people to benefit from the interest deduction on their home was basically the top 1%, ah, now it is starting to make sense.

The comment “but created the narrower home mortgage interest deduction under the theory that it would encourage home ownership” shows there wasn’t so much of a theory as a supposition. Again, very little thinking involved in policy making.