Would mortgage tax reform slow sprawl and gentrification?
The co-chairs of the deficit commission created by President Obama released several proposals this week as a starting point for a conversation about deficit reduction. One of the proposals drastically reduces the largest home ownership subsidy, the mortgage interest tax deduction.
The proposal would lower the mortgage cap within which mortgage interest is deductible from $1 million to $500,000 and eliminate the deduction for second homes and home equity loans. Such a structural change in housing incentives could have big consequences for sprawl, gentrification and other housing and land use patterns.
Sprawl: This subsidy encourages people to build more expensive homes, which are generally bigger, detached, single-family homes. Reducing this subsidization of home sizes would thus lead to greater density as a natural outcome of the free market.
Gentrification: A common response to the argument that reducing this subsidy will reduce sprawl is that it will also reduce urban infill of condos that are more expensive than existing housing. While this may concern some urbanists, I think this would be great. Poor and working class neighborhoods would upgrade their housing stock more organically, without the sudden displacements of existing residents that can occur through government-subsidized luxury condos.
Furthermore, by encouraging people to leverage themselves to the hilt, this subsidy helps undermine communities when home buyers bet big on the housing market and lose. This is true whether the buyers move into new sprawl developments in Prince George's County or infill in Columbia Heights.
The idea that the mortgage interest deduction boosts home ownership rates is a myth, as numerous economists have demonstrated. But simply comparing home ownership rates by country makes the same point.
The United States is one of only four developed countries that allows homeowners to deduct mortgage interest. And the other three (Sweden, Switzerland and the Netherlands) tax imputed income from home ownership.
Clearly, offering the most generous housing subsidies in the developed world is not the key to boosting home ownership.
Before 2010, most opponents of the mortgage interest deduction considered it a sacred cow. But with the deficit commission's co-chairs attempting to insert real solutions into the deficit debate and Tea Party-supported members of Congress talking big about deficit slashing, perhaps this massive subsidy is no longer off the table.
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