Abstract
There are several sacred cows in the Internal Revenue Code, but perhaps none quite as sacrosanct as the home mortgage interest deduction. U.S. Treasury Secretary Steve Mnuchin has characterized the mortgage interest deduction as so beloved by the American people that it is “kind of like apple pie.” Reform of the home mortgage interest deduction has been described as the third rail of tax reform, in that “touching the [mortgage interest deduction] is not just treasonous but ruinous.” That is, until December 22, 2017 when the Tax Cuts and Jobs Act of 2017 was enacted. And though the change to Section 163 may not seem significant by its own terms, its interaction with other changes to the Internal Revenue Code will result in profound change: the reduction of the home mortgage interest cap to $750,000 from $1 million will interact with the provision capping state and local property, sales, and income tax at $10,000, and the almost-doubled standard deduction. The obvious effect will be fewer homeowners itemizing their home mortgage interest deduction: an estimated 44% of taxpayers received the benefit of the home mortgage interest deduction under prior law, and it is anticipated that this number will drop to less than 15%.
Notably, the Tax Cuts and Jobs Act of 2017 continues a process of temporary-effect lawmaking—the changes to the home mortgage interest deduction expire in eight years unless extended by Congress. The use of temporary-effect legislation that came into vogue during the administration of George W. Bush has been the object of scathing critique, with a prevailing view that such legislation is generally little more than a manipulation that allows the cost of legislation to be distorted. This Article considers the advantages of temporary-effect legislation through the lens of an entrenched tax expenditure, namely the home mortgage interest deduction. The Article models the impact of the home mortgage interest deduction upon the returns of several different taxpayers, under both prior and current law. A problem is illuminated in that both the previous and present approaches are broken: a pernicious regressive subsidy has been exacerbated, and a drip-feed of upper- and upper-middle class welfare benefits delivered through the Internal Revenue Code continues. Consequently, the Article explores the anathema of temporariness to address retrenchment to fix this tax expenditure, and balances the negative externalities that flow from renewal uncertainty against long-term policy implications.
The ambition of this Article is to evaluate the recent changes to the home mortgage interest deduction both from a tax policy perspective and to also consider the politics and processes that are drivers—and so Section V suggests that it is time to pivot. Temporary-effect legislation has created a window during which it is feasible to retrench the entrenched home mortgage interest deduction from the Internal Revenue Code, with little political cost, and replace the deduction with a targeted tax credit to subsidize homeownership.