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If mortgage interest deductions were cut, who would notice?

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Gene J. Puskar / AP / File

(Read caption) This photo made on Jan. 27, 2011, shows a home for sale in Mount Lebanon, Pa. If Congress dramatically restructured the subsidy for interest on mortgages, most taxpayers wouldn't notice, writes guest blogger Howard Gleckman.

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The deduction for interest on home mortgages may be the most beloved of all tax subsidies. A politician needs only to muse about repealing or restructuring the deduction to be set upon by suburban mobs (led, perhaps, by real estate agents and mortgage lenders).

But a new analysis by my Tax Policy Center colleagues Ridathi Chakravarti and Dan Baneman finds that most taxpayers would barely notice the change in their tax bill even if Congress dramatically restructured the subsidy. And with some changes, many of us would end up paying lower taxes than we do today.

In the unlikely event Congress simply repeals the mortgage deduction, the average tax bill would increase by $710. But those who earn between $30,000 and $40,000 would pay an average of about $70 more while those making more than $1 million would pay an additional $4,000.

But the deduction isn’t going to be repealed. And if it was, some of the added revenue would surely be used to buy down income tax rates. More likely, Congress will scale back the deduction or replace it with a new design such as a tax credit. With some of these alternatives, typical middle-income households would likely pay less tax, not more. And many will see no change at all.

What’s going on? Mostly, the mortgage deduction is the classic upside-down tax subsidy. It gives the biggest tax breaks to the highest earners who borrow the most money to buy the most expensive houses. Because it is a deduction, someone in the 35 percent tax bracket pays an after-tax cost of only $65 for every $100 they borrow (even less if you figure state taxes). But someone in the 10 percent bracket pays $90—if they itemize. However, because the deduction is only available to those who do itemize and a surprising number of moderate-income homeowners don’t, many taxpayers get no subsidy at all.


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