I had meant to write this post last week, but a close family friend passed away and I wasn’t able to get too it with everything else going on, my apologies.
In passing I’ve mentioned in previous posts that I’m a Realtor. As such, I was in Annapolis at the end of last month, to join with fellow Realtors and other activists to rally (in the cold and pouring rain) in support of the Mortgage Interest Deduction (MID) that Gov. O’Malley’s budget proposes to reduce for people earning more than $100,000 per year.
While I don’t disagree with many of the people there that removing the deduction, or even curtailing it for the people most likely to use it, will likely have a deleterious effect on the housing market, that wasn’t why I was there.
In fact, and this probably won’t make me popular with my colleagues in the industry, but as a matter of general policy, I support getting rid of the MID entirely. It distorts the housing market, encourages people to take on as much debt as possible, and by acting as an effective tax on renting has a potentially regressive impact.
However, while I support getting rid of the MID, I also am opposed to using that repeal as a way to increase government revenues.
To begin with, as a means of raising revenue, it’s dishonest and lacking in integrity. Raising revenue by removing deductions, without reducing rates, is nothing but a backdoor way to raise taxes. If the governor feels that the people of Maryland need to pay higher taxes, than he ought to come out and say it outright and propose a real tax increase that everyone knows is a tax increase.
Second, not only does the proposed change in the deduction allow the governor to raise taxes without having to say he’s raising taxes, it also enables him to irresponsibly avoid making tough decisions that need to be made about the state budget and where cuts have to be made – and as has been noted by investigative journalist Mark Newgent, the governor hasn’t done anything towards making spending cuts, even though he claims otherwise.
Finally, by merely restricting access to the deduction and how much can be written off, instead of getting rid of the deduction outright, the governor only adds complexity to the tax code without doing anything to address the market distorting effects of the MID.
I’d say that it’s pretty clear there’s nothing good about this change to the MID. But it doesn’t have to be that way. It actually wouldn’t be that hard to get rid of the MID and to do it in a progressive way. Here’s my proposal:
- Phase out the MID completely over 5 years or thereabouts.
- Use the extra revenue and apply it towards reducing tax rates.
- Make the taxes targeted for rate reductions be ones that are notoriously regressive, e.g. the sales tax or vice taxes.
That achieves a number of positive ends; it gets rid of a significant distortion of the housing market, reduces encouragement to take on debt, lowers the tax burden on poorer members of the society, and makes the tax code simpler.
In contrast, the governor’s proposed alteration of the MID is a lose-lose for everyone except the governor; it raises taxes on many households, increases the costs of tax compliance by adding complexity to the code, continues the government meddling in the housing market, and perpetuates the government bias against renters but let the governor prop up his unsustainable budget growth while avoiding hard things like making real spending cuts, being honest with the taxpayers about proposed tax increases, or seriously tackling tough policy issues.
Michael Troup says
I think the “fair tax treatment” would be to rid ourselves of this concoction of exclsuions and deductions that creates individual income tax policy winners and losers. I think most of us would agree that housing, health, and education are three drivers of our quality of life. Let’s deduct those costs from income (so the money that renters pay is recognized as a housing cost) and call the rest “life choices.”
Joe Diamond says
Michael,
My understanding of the mortgage interest deduction is that it is intentional social engineering. At some point the decision was taken to promote home ownership. Population stability was a good thing. The mortgage interest deduction was a way of promoting this goal. This intention was that people stay in the community of their owned real estate rather than hitting the road to follow the boomer economy. I think the program has evolved away from that original goal.
Perhaps another way of stating what you suggest could be …………If the current generation is ever going to be homeowners much more of their income must be protected from taxation. Commuting costs, rental costs, medical insurance….maybe even consumer interest (again) undergraduate or post HS career training costs could become deductions. IF the intent is to get the economy going I think leaving more money in the hands of consumers is the direction to go.
Keeping the army at home would be a step to cut the government appetite for funds………….we can do a rigorous defense without bring the firehouse of the world.
Joe