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?