Repealing Just One Special-Interest Tax Break Would Pay For Healthcare Reform. Guess Which One.

So I've been following the Tea Party objections to the health care reform efforts. They're worried about the deficit, they just want to be left alon

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So I've been following the Tea Party objections to the health care reform efforts. They're worried about the deficit, they just want to be left alone without government interference, and they're especially angry at the government singling out some privileged groups for special subsidies. They're proud, self-sufficient patriots and they don't want handouts.

Kids, have I got a proposal for you.

I've discovered a regressive tax break that favors the wealthy and has no good rationalization for its continued use. (According to historians, it was an accident, anyway.) And oddly enough, it costs us about $100 billion annually, or $1 trillion over ten years - exactly the estimated cost of healthcare reform. Really, there's no other word for it but "pork."

It's the mortgage interest deduction.

No, it doesn't seem like a huge deal. (A lot of the people eligible for it don't even bother, because you have to itemize your tax return.) But man, it sure adds up:

But cumulatively, the deduction is a big deal. This year [Ed. note - in 2006, when this was written], it is expected to cost the Treasury $76 billion. And the rewards are greatly skewed in favor of the moderately to the conspicuously rich. On a million-dollar mortgage (the people with those really need help, right?), the tax benefit is worth approximately $21,000 a year. And according to the Joint Committee on Taxation, a little over half of the benefit is taken by just 12 percent of taxpayers, or those with incomes of $100,000 or more.

So clearly, this hits the sweet spot. Why insult people who are already doing well in the free market with this unnecessary and expensive handout?

And what better time to cut it, anyway? While housing prices are already dropping through the floor, this is when phasing out this deduction will have the least negative impact on housing prices. It will lower housing costs down to pre-speculation levels, and that means your paycheck will go farther. And it's something policy wonks on both sides can agree on.

President Obama's already on board with the concept. In his first budget, he proposed lowering the deduction in 2011 for those in the top tax brackets.(Special interest groups successfully opposed it.)

Edward L. Glaeser, an economics professor at Harvard, put it this way:

Problem #1: Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets. The size of the tax benefit is proportional to your debt. The deduction essentially encourages us to make leveraged bets on the swings of the housing market. That leverage means that housing price swings can easily wipe people out. We are currently experiencing the consequences of subsidizing gambles on housing.

Problem #2: The deduction pushes up prices in places where the supply of new homes is constrained, as it is in many coastal markets. Economics 101 teaches us that if we subsidize demand where supply is inelastic then the only effect is to make prices go up. Housing supply is pretty constrained in places like New York City because of land-use restrictions and lack of land. In these places, the deduction doesn’t make housing more affordable. It just transfers money from buyers to sellers, and that makes little sense.

Problem #3: The deduction is wildly regressive. The tax savings for households earning more than $250,000 is 10 times the tax savings for households earning between $40,000 and $75,000 a year, according to recent research by James Poterba and Todd Sinai.

If there ever was a case for small-government egalitarianism, then this is it. Eliminating the home mortgage deduction and replacing it with an across-the-board tax cut would equalize after-tax incomes without a single new government program.

Problem #4: The deduction encourages people to buy larger, single-family detached homes, and that increases carbon emissions and pushes people out of cities. The deduction encourages people to buy more expensive homes, which are generally bigger homes.

Bigger homes use more energy. The deduction is therefore implicitly urging Americans to run higher electricity bills and spend more on home heating. If global warming is a serious problem, then the government should be encouraging us to live in smaller, not bigger, dwellings.

Problem #5: The home mortgage interest deduction is poorly designed to encourage homeownership, which is, after all, the alleged desideratum. Much of the interest deduction’s benefits go to richer Americans who are likely to own homes in any case.

In fact, just about the only special-interest group still championing the deduction: Realtors. Obviously, the bigger the house, the bigger the commission. But is that good for our economy? This was written in 2007 but it's even more applicable now:

Nationally, half of renters and more than one third of mortgage holders — 37 percent, up from 35 percent in 2005, or a rise of more than 1.5 million households — spent at least 30 percent of their gross income on housing costs, the level many government agencies consider the limit of affordability.

“Maybe it all means that housing is not as smart an investment for as many people as we thought,” said Matt Fellowes, a scholar in metropolitan policy at the Brookings Institution. “Stocks perform better than houses over time. Maybe the American dream should be building wealth in general, not building a certain type of wealth, which we see is narrow and dangerous.”

Fourteen percent of mortgage-holders spent at least half their income on housing in 2006, up from 13 percent last year, while among renters there was little change. In both years, 25 percent of renters spent half their income on housing.

The rising housing burden cuts into the money people have available for other expenses and anticipated the rise in foreclosures.

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