I'm deluged by ads about preserving the Minnesota home mortgage interest deduction

[progree]

Darn near every web page I've visited for many months have one of the frickin ads from the "Minnesota Homeowners Alliance", saying something like: "we're telling the legislature: protect my home tax benefits! Sign the petition"

But I haven't heard or seen any serious proposals to end the mortgage interest deduction in the legislature. I googled, and couldn't find anything.

Myself, I've never been a fan of it, because I think home prices just rise to compensate, and so we end up in about the same place as far as affordability.

And because it is regressive -- higher income people in higher tax brackets get a bigger deduction than lower income people. And people who wouldn't have enough deductions to itemize without this particular deduction get only partial benefit. (A tax credit instead of a deduction would solve both problems in this paragraph). But were it gotten rid of, it should be phased out very slowly like over a decade at least.

And as a general rule, for the most part, I think state tax law should be as close to federal law as possible, just to keep tax complexity down.

Oh, and I don't think renters (who don't get this tax break, at least not directly) should be subsidizing homeowners (who do). Just another benefit for the more fortunate that widens inequality.

Anyway, just wondering if you are sick, sick, sick and tired of seeing these ads (or did I click on some bad link which forever tagged me as someone interested in the subject), and what's going on at the legislature in this regard. Thanks.

[The Velveteen Ocelot]

1. I haven't noticed them (I use AdBlocker), but my guess is that

the ads are mainly sponsored by the real estate sales people. Residential housing sales are affected greatly by mortgage interest rates and the tax deduction - which is also kind of a big deal for middle-income people and not just the wealthy. I haven't seen any movement to eliminate that deduction for either the state or the federal deduction (which would have much more impact than at the state level), and doing so would be spectacularly unpopular - it's one of the few big tax deductions available to non-wealthy people. I don't see it happening, but maybe the real estate people are just trying to be sure it never will.

[progree]

2. I think house prices are higher because of the interest deduction

that house prices rise to the point where its barely affordable for the average family. So I don't think it really saves the homeowner much or any money when this is taken into consideration.

And our overall tax rates are higher to make up for the revenue loss from tax breaks (as always), so this is another way in which it is eye wash pandering to the voters without really reducing taxes overall (just pitting homeowners against renters. Just as politicians like to do: pit the middle class against the lower class, and the middle class is too obsessed with the "takers" beneath them, that they won't care that the upper classes are running away with 95% of the gains. And I'm a homeowner by the way)

And it is regressive -- but like the Bush tax cuts, throw in something for middle class, and then they won't complain that the majority of the tax break by far goes to the wealthy. Someone in the 33% tax bracket, for example, gets 33/15 = 2.2 X the dollar benefit that someone does in the 15% tax bracket. And even more so for the higher brackets.

And those who wouldn't be able to itemize without it -- generally people in the lower end of housing affordability -- only get a partial benefit from it.

However, I agree that it is politically very popular (to keep it), and if it were done away with all of a sudden, it would really be a very bad shock to the housing market. And we certainly don't need to be pushing people who just got above water on their mortgages back underwater again. Which is why I say that if it is done away with, it would have to be phased in over at least 10 years (ideally it could be phased in slowly during hot housing markets, and phase-ins suspended during poor housing markets). [font color = red]On Edit:[/font] And some kind of nearly equivalent tax lowering or benefit of some sort would have to be given in exchange.

I know Keith Ellison at the federal level is proposing replacing the deduction with a tax credit, and that gets rid of the problems of regressivity. That is a debate worth having -- in effect it gives everyone a 15%, or 20% tax credit on their mortgage interest regardless of which tax bracket they are in, or whether they can itemize or not.