Recently, The National Commission on Fiscal Responsibility and Reform, co-chaired by North Carolinian Erskine Bowles, has called attention the home mortgage interest deduction (MID)  provisions of the Internal Revenue Code, while making sweeping proposals to address the growing federal budget deficit.

Briefly, the MID allows homeowners to deduct the interest paid on their mortgages in calculating their annual tax liability.  The current code allows for deductions on interest paid on up to $1 million of primary or secondary home indebtedness as well as up to $100,000 in home equity indebtedness.  This deduction reduced individual tax liability by $86 billion in 2009 and is projected to reduce tax revenue by $500 billion for the period 2010-13.

By nature this interest deduction benefits higher income taxpayers disproportionately due to the higher marginal tax rates coupled with higher mortgage levels.  75% of the benefits of the MID accrued to taxpayers with over $100,000 in annual income.

Comparing the $86 billion housing subsidy that this deduction provides with the FY11 Department of Housing and Urban Development (HUD) total budget of $43.58 billion raises some questions about our collective housing priority.  With very few low or very low income households able to take advantage, it is safe to say that the housing subsidy provided to middle and upper income Americans is double that of the housing subsidy (through HUD) that is available to very low-, low-, and moderate income Americans.

It can be argued that the MID has helped raise the national homeownership rate since its inception in 1965 when the homeownership rate was at 63% vs. today’s current rate of 66.9% (the rate peaked in 2004 at 69.2%).  However, the U.S. current homeownership rate lags somewhat behind Canada’s national rate of 68.7% in the absence of an MID in Canada.

The Commission has proposed a tax credit of 12% on interest paid on up to $500,000 in mortgage debt on primary residences only.  This change will increase government tax revenue while also redistributing the subsidy more proportionately toward lower and moderate income taxpayers.

Habitat is a proponent of home ownership at all levels of our society.  However, the allocation of housing subsidy toward higher income taxpayers raises some questions of economic justice that should be discussed.  What do you think?