Study Measures Mortgage Interest and Real Estate Tax Deduction Benefits
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Back in November we reported that The President's Advisory Panel on Federal
Tax Reform had submitted recommendations to then Treasury Secretary John Snow.
Principal among the panel's suggestions were the elimination of federal income
tax deductions for state and local taxes which would include the current deduction
for local property taxes and the replacement of the current deduction
for interest payments on home mortgages of up to $1,000,000 with a tax credit
of 15 percent of the mortgage interest paid. The Panel maintained that this
change would actually be advantageous to low and middle income homeowners although
comments received on this website from those who made the computations based
on their own circumstances did not concur, at all! The recommendations would
pretty much do away with any deduction for a second owner occupied vacation
home which, with some restrictions, is allowed under the current tax code.
Under current rules, itemizing taxpayers can deduct interest
and origination points on home loans and on equity lines of credit for both
first and second (vacation) homes up to a total of $1,000,000 in value, and
properties taxes on both, even if paid in a foreign country.
This is not the first time these deductions have been placed on the chopping
block and this time the recommendations pretty much evaporated in the face of
heavy opposition, but a study released recently by the National Association
of Home Builders illustrates the bonanza that awaits the federal
treasury if such changes were to take place.
The publication "Local Use of the Mortgage Interest and the Real Estate
Tax Deductions" by Robert Dietz, Ph.D. analyzes, on a micro basis, the
benefit to taxpayers and the cost to the treasury of these
deductions.
Using data from 2003 tax returns and the 2000 census, the study computes tax
payer savings (or treasury losses depending on your perspective) on a federal,
state, and congressional district level. The numbers are astounding.
For starters, while study is using the 2003 figures, it quotes The Congressional
Joint Committee on Taxation as estimating that the value of the mortgage interest
deduction to taxpayers this year will be $69.4 billion and
the deduction for real estate taxes is equal to $19.9 billion.
In 2003, 35 million taxpayers used the home mortgage deduction, deducting an
average of $9,650 for each filer and 39 million taxpayers took the real estate
tax deduction with an average of more than $3,000 per filer. These are the most
widely used deductions under the federal tax code.
Jerry Howard, executive vice president and CEO of NAHB stated that "Because
Mortgage interest and real estate deductions significantly reduce federal tax
liabilities for home owners, they are important tools for promoting homeownership.
The report shows that millions of working families across the nation use and
depend upon these important tax incentives to help them maintain their current
standard of living."
The study states that the average congressional district - and there
are 435 of them - contains roughly 80,000 taxpayers who claim the mortgage
interest deduction and 88,000 who take advantage of the property tax deduction.
While congressional districts are designed to contain roughly the same number
of citizens, the deductions are not utilized evenly across the congressional
districts or the states. The six districts with the smallest number of taxpayers
claiming the mortgage interest deduction, for example, are all located in New
York City where people overwhelmingly rent. The 6th Congressional District of
Colorado which encompasses the outlying areas and suburbs of Denver contains
the highest number of taxpayers who claim the mortgage interest deduction, approximately
153,000. The fast-growing suburbs of Atlanta, New York, and Washington, DC also
rank high in the number of residents taking advantage of the benefit. California
has 4.6 million mortgage interest claiming taxpayers while Wyoming, one of the
least populous states, has the fewest at 36,000. (The entire state of Wyoming
may lack the total number of residents necessary to actually constitute a congressional
district.)
The 14th district of California, which contains parts of San Mateo, Santa Clara,
and Santa Cruz counties and is home to Silicon Valley, ranks number one in the
cash value of the mortgage interest deduction, $3.2 billion. The State of California
is tops among the states as well; the mortgage deduction statewide is estimated
at $65 billion. On the other end of the scale is North Dakota at $260 million.
Across all districts the average amount of the deduction for mortgage interest
is $9,500 but the 14th district of California again leads with an average of
$35,000. The state also has the highest average deduction, $14,000, while Oklahoma
has the lowest at $5,700.
Real estate tax deductions averaged a bit less than $3,000
per household nationwide and were highest in New York's 18th district which
includes fabled Westchester County. The average tax deduction there was $12,000.
The western suburbs of Houston, Texas in the 7th congressional district were
second with an average of $8,900. Alabama had the bottom to itself - taxpayers
in its 2nd, 3rd, and 4th Congressional districts claimed an average of $550
to $675 in real estate taxes. Coming in last is not necessarily a bad thing.
New York's 3rd congressional district, comprised mainly of the eastern
half of Nassau County (Long Island) had the largest aggregate amount of real
estate tax deductions - $1.25 billion. In fact, New York and New Jersey districts
with suburban demographics comprise the top nine districts in terms of total
real estate deductions while the lowest levels of deductions were found in the
renter-dominated city itself. California led the states with total deductions
of 12.5 billion and Wyoming was last with total taxes deducted at $65 million.
With these kinds of numbers in play, it will be remarkable if the real estate
tax and mortgage interest deduction benefits do not soon come into play again
as the government struggles to deal with skyrocketing deficits.
Using a rough average tax number of 15 percent, the elimination of the real
estate tax deduction would result in additional taxes of $2.98 billion and doing
away with the mortgage interest deduction (without any adjustment such as the
15 percent tax credit suggested by the panel) would bring in an additional $10.41
billion. Next we hope to see a study projecting the disruption such a massive
change would bring to the housing market and to the currently thriving state
of homeownership.
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