April 13 2011

Urban Planning Goals vs. Mortgage Interest Tax Deduction

With the budget in shambles and a crushing debt, United States policymakers are beginning to look anywhere they can to shed some extraneous dollars.  President Obama’s bipartisan National Commission on Fiscal Responsibility and Reform made some very strong and somewhat extreme recommendations on where to cut the budget. The recommendations included the often-politically suicidal Social Security and Medicare programs, but extreme measures are appropriate with extreme debts.  One suggestion from the commission that interests urban planners is the reduction or outright elimination of the Mortgage Interest Tax Deduction, the chief public subsidy meant to encourage homeownership.

Despite its popularity and an annual tab of around $100 billion, one can understand the fiscal benefits of reforming this policy.  For new homeowners, the deduction can often mean the difference between purchasing a preferred home and a fixer-upper, if a home at all.  Is this what a heavily-indebted government, with oversight of an economy still trying to recover from a housing bubble burst needs to encourage? With a national foreclosure rate of over 2%, I think it is a valid question.  On the neighborhood level, one foreclosure can destabilize the prices and purchasing appeal of an entire block.  Of course, this was the intent of the Neighborhood Stabilization Program, an effort by the federal government to counteract a foreclosure virus, which they were likely complicit in creating.

In addition, we have to consider where those homes are being purchased.  Although hard data is difficult to find, most new construction homes and homes purchased are likely to be in suburban areas.  There is more room for growth in outlying areas. Neighborhoods closer to the city are usually fairly stable, thus creating fewer new homeownership opportunities, or deteriorating and fairly undesirable for most homebuyers.  According to a number of housing preference surveys, there may actually be a strong demand for more urban housing. However, as long as subsidies exist for middle-class families to purchase homes (not to mention the building of highways), most of the homes purchased are going to be new construction in exurban areas, transferring demand to areas in which it would not otherwise be.  From the viewpoint of contemporary urban planning goals, the deduction may be hindering attempts to create more sustainable communities while weaning ourselves from runaway suburban development; to which the National Association of Realtors disagrees.

The “sacred cow” deduction looks to be safe from the cuts as of right now, but it may not last much longer.  Urban planners, usually formed from somewhat of a liberal mold, are now supported in this goal. There is a very outspoken wave of libertarianism that is intent on ridding the budget of most if not all market-distorting subsidies.  With such a growing opposition, perhaps sustainable planning goals for the pent-up urban housing demand will be realized within the next decade.

If you were a lawmaker, what would you do? Leave it as is, reform its structure, or eliminate the deduction altogether?

Ryan Champlin

I am a freelance urban and social critic with a background in urban planning and New Urbanism, community and economic development, and social policy.

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This entry was posted on Wednesday, April 13th, 2011 at 11:20 am and is filed under Environmental Design, Urban Planning and Design. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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3 Responses to “Urban Planning Goals vs. Mortgage Interest Tax Deduction”

  1. Herb Champlin Says:

    This is a tough one. But pretending to be a politition, wanting to listen to my constituents and do what’s best for the communities that I represent, I would be leaning more towards eliminating the deductions. Just from the minute amount of knowledge that I have accrued over the past few months, as well as listening to my son the environmental and societel planner and proponent of urbanism, I am getting the very strong feeling that the urbanist mindset and culture is catching on quite strongly.
    After working one short afternoon with a SLC realtor, and listening to Ryan and him bantering back and forth about the cities and the home buyers expectations, based on their own experiences, it became quite clear that this movement is not just a short term phenomenon. Yes, there are still the suburban developements being built or expanded upon. But it is becoming very clear that the real value, both personaly and property wise, lies close to the city center, local transit routes, and frequented establishments.
    As a responsible politition, I wouldn’t be able to deny this activity and would thus vote to eliminate the mortgage interest deduction through a phasing out over 5 years. This along with a gradual increase in the Social Security and Medicare age requirements and a small payroll tax increase to help suppliment the same, would be a plan that I could agree with, sereiously!
    But I’m not a politician, and I’m a bit biased, because I don’t have a mortgage and I’m above the age for any SS phasing.
    On gosh>>>>>>> my political aspirations are dead!!

  2. Ryan Champlin Says:

    Thanks for the comment! It seems to me that there are some good reasons to keep the deduction, at least for homes up to a certain value, but if I had a choice of getting rid of it or keeping it the way it is, I would scrap it.

  3. ArroyoLover Says:

    Eliminating the mortgage interest tax deduction (MITD) only makes sense if Congress agrees to eliminate ALL tax subsidy credits (which I doubt will happen). For middle class earners with no children, there are now only two arenas in which they can claim significant tax relief: the MTID and small business expense profit/loss deduction. I don’t see new urbanists suggesting that we stop promoting new businesses. Why pick on real estate? There are plenty of urban homeowners (especially single women, now the largest group of home buyers nationwide according to the NAR)who purchase in part because of the benefit of the mortgage interest tax deduction. The assertion that MITD just encourages sprawl is disingenuous and not based upon the facts as to who is actually buying homes these days. Moreover, according to the 4/23/2011 NY Times article on new housing starts: ‘Builders and analysts say a long-term shift in behavior seems to be under way. Instead of wanting the biggest and the newest, even if it requires a long commute, buyers now demand something smaller, cheaper and, thanks to $4-a-gallon gas, as close to their jobs as possible. That often means buying a home out of foreclosure from a bank.’

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