November 05, 2005

Mortgage Deduction Reform: Regionally Biased?

In a previous post I noted one principal objection to the Bush panel's suggested reform of the mortgage interest tax break: the basic (although not severe) unfairness of changing the tax treatment of housing after a lot of wealthy folks had factored the deduction into their purchase of expensive homes.

There's another criticism that's getting more play on the East and West coasts: if you're going to put a cap on the mortgage interest deduction, you have to factor in regional differences in housing costs. The Bush panel's recommendations would do just that, by using Federal Housing Administration loan limits (which vary by region) as the mortgage cap. But in some super-high-end areas in California and New York, the FHA limits are well below median home prices, as this article notes:
The FHA limit varies by region, but in the Bay Area and most of coastal California is $312,895... far short of the typical mortgage needed to buy a house in the Bay Area, where the median price for an existing single-family home was $726,900 in the second quarter, according to the National Association of Realtors.
But this line of criticism is missing the whole point of the deduction. The idea is to encourage homeownership, not dream-homeownership. I would love to live in San Francisco. I can't afford to, and that's sad. But the idea that I should get a federal tax cut to help me relocate to just the right neighborhood in my favorite city is so wrong it's offensive.

Sorta related: take a gander at the pages on the FHA website where you can look up the applicable loan limit for your area. There are a lot of numbers here, which means you'd need a multi-page table in the tax forms to make this work. That's hardly a disqualifier for what is otherwise a fine reform idea-- it's just to point out that while some elements of the Bush panel's plan might help achieve tax simplification, this isn't one of them.

7 Comments:

At 9:19 PM, Anonymous Anonymous said...

...the basic (although not severe) unfairness of changing the tax treatment of housing after a lot of wealthy folks had factored the deduction into their purchase of expensive homes.

The resistence of the masses to increases in the land tax because of the effect on capitalized land rents is a source of great evil.

 
At 4:31 PM, Anonymous coleen said...

I understand your concern with people wanting to have a dream home and write off a chunk of it as taxes, but I'd ask you to reconsider "that I should get a federal tax cut to help me relocate to just the right neighborhood in my favorite city is so wrong it's offensive." I don't live in SF, but I do live on the other side of the bridge. My husband and I bought an 800 sf house a few years back which would likely now sell for 500K. If at some point we would like to have kids, the thought of moving to a slightly larger place does sound appealing. But unless we can somehow find anywhere between 700K-850K we won't be in a neighborhood with decent schools, and even then, we're still looking at over 650K to get a larger (e.g. 1300 sf) home. That's not my dream home; that's the reality of this location. Just fyi.

 
At 4:45 PM, Blogger Paul said...

Coleen. I wish you luck in your house search when the time comes. There are plenty of lovely houses where I live, in a suburb of Minneapolis, that cost much less than 500K, and the local school districts are excellent. So why should you receive a huge write-off because you choose to live in SFO, rather than MSP?

 
At 3:51 PM, Blogger Katherine Blauvelt said...

Matt,
What do you think of the Panel's argument that by eliminating the need to itemize this deduction, it makes it 'more fair,' as more taxpayers are eligible to take the credit.

 
At 4:25 PM, Blogger Matt G said...

Jeez, they'll let anybody comment on these things.
Katherine, the Panel is right on. Done as a credit and given to nonitemizers, this will be a much better targeted thing than it currently is. Of course, making it a fairer and more generally usable tax credit puts it in direct competition with direct housing subsidies done through the spending side of the federal budget-- and makes you ask why this thing is being done thru the tax code at all. But the Panel's suggestion--on this point at least-- is a step in the right direction.
Coleen, I'm in the same boat as you, except my tiny little row house is in Washington DC. I can't afford a bigger place, and I'd really like one. That, as you say, is the reality of DC. Does this mean that a tax subsidy for me ought to be a federal spending priority right now? Seems pretty hard to justify.

 
At 6:20 PM, Blogger Katherine Blauvelt said...

Matt,
So on a slightly unrelated note, but related in terms of thinking about equity in the tax code:

What do you think about the proposals to eliminate standard deductions & personal deductions, EITC, replace with a "Family" and "work" credit (which are worth less in total), PLUS change the tax rates so that the first tax rate is 15%, but overall a flatter tax distribution -- Does this, on balance, make a low-income person better off or worse off? Does it just depend on the family circumstances (I'm kinda thinking it's that)? I'm just not sure how to properly think about all of these changes and what their net impact is. THoughts??

 
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