U.S. mortgage tax break has got to go
BARRIE MCKENNA
March 25, 2008 at 6:00 AM EDT
It's the topic no one dares speak of amid all the hand-wringing about the great credit collapse of 2008.
Mortgage deductibility. For many Americans, particularly the wealthy, it's the single largest tax break they get, saving them thousands of dollars and depleting the U.S. Treasury by as much as $100-billion (U.S.) a year.
It also may be a key reason we're in this mess.
Experts have pointed the finger at Alan Greenspan, easy money, mortgage brokers gone wild and the wise guy on Wall Street who figured out how to turn junk mortgages into a triple-A investment.
Now probably isn't the right time to suggest that the answer lies in the tax code. This, after all, is tax season and many people are smarting from tumbling stocks and slumping home values. The last thing Americans want to hear is that they should be paying more tax.
Too bad. It's a subject that needs to be discussed, as the aftershocks of this U.S.-made credit crunch reverberate around the world.
Most Canadians have no idea how generous this tax break can be, and how distorting it is to the economy, particularly the housing sector.
Think of mortgage deductibility as the kindling that fuelled the credit explosion.
Here's how it works: A taxpayer gets to deduct all interest payments on mortgages worth up to a total of $1-million. And the break doesn't just apply to a primary residence, but also to a second home, a yacht, or even a motor home.
On a $1-million mortgage, the deduction is worth more than $20,000 a year, or more than enough incentive to get that bigger, pricier home.
As if that weren't enough, homeowners can also deduct the interest on a home equity loan up to $100,000 – to buy a car, a big-screen TV or a diamond tiara (if that's what they're into).
The exemption encourages high-income earners to buy as much house as possible, and then to leverage it to the hilt. Ever wonder why so many homeowners opted for risky all-interest mortgages?
Mortgage deductibility encourages overbuilding, oversized homes, higher prices and speculation. It has helped turn Americans into credit junkies.
If the scenario sounds familiar it's because these are the features that marked the housing and credit bubble of the past five years.
Americans greedily gorged on monster homes and vacation condos – overinflating prices and sticking the bill on the U.S. Treasury. Some economists estimate that mortgage deductibility adds as much as 15 per cent to the cost of homes, most notably at the upper end of the price spectrum.
And it's regressive to boot. More than two-thirds of all U.S. taxpayers, including most renters, don't bother to itemize their deductions, typically because they don't earn enough to make it worthwhile. The third who take more than the standard deductions are almost all among the top third of income earners.
Sadly, challenging the merits of the mortgage tax giveaway is tantamount to political suicide. Most Americans consider mortgage deductibility a birthright, like home ownership itself. And a powerful army of lobbyists stands ready to beat back any attempt to end the tax break, including real estate agents, mortgage brokers and home builders.
People have tried. Back in 2005, President George W. Bush appointed a bipartisan panel of experts to look at ways to make the tax code simpler and fairer. Somewhat surprisingly, the group's centrepiece recommendation was a plan to phase out mortgage deductibility. “Why would you want an abnormally large subsidy for people who have abnormally large mortgages?” wondered one panel member, a former commissioner of the Internal Revenue Service.
It was a very good question. But predictably, the report was shelved, where it continues to gather dust.
Last summer, Congressman John Dingell, a Michigan Democrat, tried again, arguing that the mortgage tax break had bred McMansions and wasteful energy spending. His bill quickly fizzled.
In the inevitable post mortem that is sure to follow the current crisis, scrapping mortgage deductibility should be added to a growing reform to-do list.
U.S. authorities should review Wall Street compensation and risk management practices. They need to toughen mortgage lending standards.
And mortgage deductibility must go before the next real estate cycle begins.
We've all paid too high a price. |
