Syracuse University Economics

Andrew Hanson, PhD Candidate

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"Capping the Mortgage Interest Deduction" forthcoming in National Tax Journal, accepted August 2007 (with John Anderson and Jeffrey Clemens)

Abstract:
The purpose of this paper is to examine the economic implications of capping the Mortgage Interest Deduction (MID), whether by some regionally adjusted set of caps as the President’s Advisory Panel on Federal Tax Reform recently recommended or by a flat national cap as under current law.  Our analysis is set in the context of a user cost model of owner-occupied housing, which we extend to include a cap on the size of mortgage that receives tax-preferred status. Although a $1 million cap currently exists, this feature has not been included in earlier user-cost models.  We use our model to show that capping the MID changes the user cost of housing through the share of the mortgage exceeding the cap, and also creates a cost difference between debt and equity financing above the cap.  Using data on actual mortgages we show that for taxpayers with mortgages above the current-law cap user cost is about 4.41 percent higher than estimates that do not account for the cap.

We go on to simulate the share of mortgage dollars that would be subject to the caps in the Panel’s recommendation, as well two alternative proposals to create caps at the national and Metropolitan Area level.  For comparability, both of the alternative caps in our analysis are designed to impact the same share of mortgage dollars as the Panel’s caps at the national level.  We show that the Panel’s caps, which involve a set of regional caps with a national ceiling and floor, would increase the user cost of housing by about 0.61 percent for all mortgage holders on average. 

The first alternative to the Panel’s recommendation that we explore is lowering the national cap.  Our analysis shows that in order to expose the same share of mortgage dollars to this type of cap, the current law cap would need to be lowered to $312,000.  Our analysis focuses on the differential impact across regions that changing the national cap would have.  The second alternative to the Panel’s recommendation that we explore is a set of caps created at the Metropolitan Area level that hold constant the share of mortgage dollars exposed to each cap.  This set of caps would range from a low of $102,000 in Odessa, TX to a high of $769,000 in San Francisco, CA.  The range of these caps highlights the relevance of changing the current cap across different areas of the United States.  We also highlight the user cost effects of each type of cap and the average reduction in subsidy that each alternative would create.

To Read the Full Paper Click Here (pdf)

To View Results for All MSA's Click Below:
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