WASHINGTON – Jan. 31, 2011 – According to a new study from the National Association of Home Builders (NAHB), a proposal to eliminate tax deductions for mortgage interest and real estate taxes would raise taxes disproportionately for middle-class households and make the income-tax system less progressive.
The study found that primarily middle-class taxpayers, with incomes between $50,000 and $200,000, benefit from the real-estate-related deductions; and larger households and families, such as those with children, earn the greatest benefits.
“Proposals to reduce or eliminate the mortgage interest deduction are short-sighted and would harm the economy and job creation at a time when housing is poised for recovery,” says NAHB Chairman Bob Nielsen. “The deduction is the mainstay of our housing policies and tampering with it would break faith with the millions of families who rely upon it to meet their household expenses – and with millions more who one day would like to be able to afford to own a home of their own.”
According to the study, taxpayers earning less than $200,000 claim 68 percent of mortgage-interest-deduction benefits and 77 percent of real estate tax benefits. The same people pay only 43 percent of all income taxes.”
Using data from the nonpartisan Joint Committee on Taxation (JCT), the report detailed the tax liability, mortgage interest deduction and real estate tax deduction for five income groups. The report found that the shares of the total benefits of the two housing deductions exceeded the shares of taxes paid for every income class except the last one, those earning $200,000 or more.
These data “demonstrate that the mortgage interest and real estate tax deductions make the U.S. tax system more progressive, not less, as is often claimed,” the report says.
The report adds that “for taxpayers with less than $200,000 in adjusted gross income (AGI), the average tax benefit of the mortgage interest deduction is equal to 1.76 percent of AGI. For taxpayers with more than $200,000 in AGI, it is equal to 1.5 percent. This is clearly indicative of a progressive tax benefit.”
The study also examines the relationship between housing tax benefits and household size to addresses the criticism that the mortgage interest deduction compels people to purchase a larger, more expensive home than they need.
Using the IRS data from 2004, the study found that the average benefit of the mortgage interest deduction rose fairly steadily with the size of the household. “These results are consistent with intuition,” the study says. “Larger households and families require larger homes. And larger homes require additional mortgage debt to finance, particularly for younger homebuyers, who are or may be in the process of having children. These greater home finance costs imply larger deductions for mortgage interest and real estate taxes.”
The entire report: Who Benefits From the Housing Tax Deductions? is available on NAHB’s website.
© 2011 Florida Realtors®
Reprinted with permission. Florida Realtors®. All rights reserved.