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Cut to Invest: Reform the Mortgage Interest Deduction to Invest in Innovation and Advanced Industries

Reforming the mortgage interest deduction (MID) offers an opportunity for the federal government to realize hundreds of billions of dollars in savings over a 10-year period to contribute toward deficit reduction as well as to invest a portion of the savings in policies and programs that are likely to spur more productive and innovative economic growth.

The recommendation to cap the income tax rate at which taxpayers can take itemized deductions, including the mortgage interest deduction, at 28 percent has been proposed by the Obama administration in each of its past four fiscal year budgets. This reform would only affect married taxpayers filing jointly with adjusted gross income (AGI) over $250,000 and single taxpayers with an AGI over $200,000.

A second common proposal has been to convert the mortgage interest deduction from a tax deduction to either a refundable or non-refundable tax credit, and to lower the cap on the overall mortgage value eligible for the subsidy. This course of action was proposed in various forms in reports by both of the major bipartisan deficit reduction committees in 2010:

  • The Bipartisan Policy Center’s Debt Reduction Task Force Plan (Domenici-Rivlin) proposed shifting the MID to a 15 percent refundable tax credit to all taxpayers, lowering the mortgage limit from $1.1 million to $500,000, and eliminating the provision that allows taxpayers to deduct mortgage interest for second homes and home equity loans

  • The National Commission on Fiscal Responsibility and Reform’s plan (Simpson-Bowles) largely mirrored the Domenici-Rivlin plan for reforming the MID, but instead called for a 12 percent non-refundable tax credit

In recent months, a third common reform proposal has been to implement an overall cap of between $25,000 and $50,000 on itemized deductions, which would include the MID, the deduction for charitable contributions, and other subsidies in the tax code.

Adopting any of these proposals for reforming the home mortgage interest deduction would:

  • Raise hundreds of billions of dollars in income tax revenue over ten years for the federal government to contribute to deficit reduction and investment in productive and innovative growth

  • Create a fairer balance in benefits among lower, middle, and upper income homeowners

SERIES: Remaking Federalism | Renewing the Economy | Number 10