Let me ask a simple question: Do you think people who live in places like Waterloo, Iowa, should subsidize the cost of owning a home for people who live in Honolulu? How about people in Topeka, Kan., subsidizing homeowners in Pacific Palisades? Or homeowners in Beaumont, Texas, subsidizing condo owners in Boston?
I thought not.
Well, that's what the National Assn. of Realtors favors. They don't put it quite that way, of course, and neither does President Clinton. But that's what it comes down to if you favor protecting the home mortgage interest deduction at the expense of replacing our current tax code with a flat tax.
I learned the following from a recent NAR press release: "We feel strongly that the ability to deduct mortgage interest must be retained. This key deduction, which has been part of the Tax Code since 1913, must be included in any tax reform proposal.
"Several flat-tax plans have been proposed in the past as alternatives to the current code, and such plans could resurface this year. We will remain vigilant in opposing any tax reform plan, including a flat-tax plan, that does not retain the deductibility of mortgage interest. These ill-conceived proposals must be viewed for what they really are: a hidden tax increase for the nation's homeowners--specifically, the middle class. Of the more than 20 million families claiming this deduction, 76% have household incomes of less than $75,000, and 45% have incomes below $50,000."
Perhaps so. But how much is the deduction worth in actual tax savings? And to whom? The benefit to a $50,000-a-year couple buying as much house as they could qualify for with a 5% down payment would not be dramatic. Such a couple--common in much of rural California as well as in the rest of the nation--won't have a very large mortgage and would not pay the top tax rate.
On the other hand, it's a great benefit for the highest-income families. It has been estimated that families with incomes of more than $200,000 a year (the top 1.2%) get 22% of the tax savings. The same study estimates that families with incomes of more than $100,000 (the top 5.6%) get nearly half the mortgage deduction benefits. (This is true even though the tax law caps the mortgage deduction so it does not greatly benefit someone with, say, a $10-million mortgage.)
Apparently the National Assn. of Realtors would prefer to retain our miserable tax system just to maintain the illusion that residential real estate is a tax-benefited investment widely enjoyed by the general public.
My suggestion: Rethink the problem.
In much of the country, the median home buyer gets no tax benefit at all from home mortgage interest. Remember, it reduces your tax bill only to the extent that the deductions exceed the standard deduction.
In addition, while half of all homeowners might enjoy a greater benefit, it depends on when they purchased their house, their interest rate, etc. Deductible interest is really terrific for people who own two houses or a house and a yacht (or RV) that they qualify as a house. It's also great for a congressman who maintains a home in Washington as well as in his home district.
But the real result is typical of the hodgepodge tax system that we have. Great tax benefits are available to some regardless of need. Taxes are forced on others, regardless of circumstances. With the median home buyer getting no tax benefit, the mortgage interest deduction can hardly be called a middle-class benefit. It's a nice trinket for the Borrowing Upper Middle Class.
The Borrowing Upper Middle Class, like all taxpayers, would be better served by a lower--and flat--tax than by a random shipment of tax benefits from Pittsburgh to Brentwood.
* Scott Burns writes for Dallas Morning News. He can be reached at firstname.lastname@example.org, or at his Web page at http://www.scottburns.com