I've never quite understood why home mortgage interest is tax deductible. It seems to me like the government shouldn't be in the business of subsidizing people's lifestyles - the bigger the home that you buy the bigger the subsidy you get. And this is unlike any other purchase you make. If you buy your groceries on a credit card and end up paying interest on that debt you can't deduct it. Similarly, you can't deduct the interest on a car loan. The only explanation I've ever heard is that the more people that own homes the less likely they are to riot in the streets. Oh...and I guess the banks and the National Association of Realtors are pretty powerful lobbies.
Well, times are tough now and the government has finally decided they better do something about the huge deficit we have so they appointed a deficit reduction commission to come up with a plan to balance the budget by 2015. And just yesterday the Wall Street Journal reported that even the mortgage interest deduction sacred cow is at risk with this commission. We will have to wait until December 1 to find out what they ultimately decide since that's when their final report is due. However, in the meantime we can debate what might happen and what should happen.
- On the one hand, you can argue that there is not anything more special about a home than a car so why treat it differently?
- On the other hand, if you change the rules now it's really not fair to all the existing homeowners who made their financial plans based upon an interest deduction.
- Then again you could merely limit the deduction to some reasonable amount so that you don't end up subsidizing extravagant homes.
- But if you eliminate or limit the mortgage interest deduction then you create an asymmetry between landlords who can deduct interest and homeowners who can not. Is that right?
- But that's no different than a car leasing company that gets to deduct the interest on a car they lease out while a buyer of that car can not deduct the interest.
- And can you really pull the rug out from under the housing market at a time like this when the market is struggling anyway?
I for one would gladly embrace the elimination of the tax deduction - assuming they would lower overall tax rates (I guess that's not consistent with deficit reduction is it?). But I just don't think that's a realistic outcome with the very powerful banking and real estate lobbies at work. However, if they do significantly cut back or elminate the mortgage interest deduction you can bet that it will drastically reduce the number of people looking to buy homes and increase the number looking to rent. Being a landlord in Chicago might actually start to make sense.