In Retrenchment, Temporary-Effect Legislation, and the Home Mortgage Interest Deduction, Victoria Haneman assesses the tax legislation enacted in December 2017 as it relates to a favorite target of tax policy opprobrium, the home mortgage interest deduction (MID). Haneman argues that the 2017 changes that affected the MID are, at their core, regressive. For this purpose, the relevant provisions are the doubling of the standard deduction and the limitation of deductible mortgage interest on new loans to principal amounts of $750,000 instead of $1 million. (Presumably, one also could include the effective limitation of deductible mortgage interest on old loans to principal amounts of $1 million instead of $1.1 million.) Notwithstanding Haneman’s dim view of the 2017 changes, she sees brightness at the end of the tunnel: As enacted, these changes sunset after 2025, forcing legislators to reconsider the MID and perhaps repeal it wholesale. Although Haneman wisely doesn’t guarantee that dawn will bring an enlightened legislature, she sees value in opening a “window of opportunity” through which the rays of genuine tax reform could shine. Finally, Haneman proposes replacing the MID with a limited tax credit for homeownership based on the purchase price of a taxpayer’s home.
One might quibble with Haneman’s critique of the 2017 tax legislation as regressive. As an initial matter, the changes in § 163(h)(3), which sets the formal metes and bounds of the MID, seem progressive on their face. In 2018, less interest paid on larger loans is deductible. Sure, the 2017 legislation didn’t extend or make permanent the deductibility of mortgage insurance premiums, which might have benefitted lower-income taxpayers, but those with the income to borrow and buy expensive homes presumptively took a hit. But looking only at § 163 is misleading, since the larger standard deduction severely curbs the MID’s benefit for taxpayers in the middle of the income spectrum. From this perspective, Haneman notes, the share of the MID that flows to higher-income taxpayers will be greater in 2018 than in 2017, and that’s regressive. Of course, it’s hard to know when to stop in this endeavor: why not also include the (capped) deduction for state and local taxes, or the rate structure, or any number of other changes in taxes, regulation, or spending during the 115th Congress that affect taxpayers’ economic bottom lines. The lines delineating a policy issue must be drawn somewhere, and Haneman’s construction of the MID vis-à-vis the standard deduction an imminently reasonable choice.
Embedded in Haneman’s construction of the MID are several features that somewhat temper her claims about regressivity. First, the big losers (in current political parlance) seem to be taxpayers with incomes between $100,000 and $200,000, whose share of the MID falls from 38% to 20%. Not exactly the destitute. The big winners (same lexicon) are those earning more than $200,000, whose share of the MID increases from 46% to 58%. The plebes’ share of the MID falls by a mere four percentage points, from 16% to 12%. Are we really so heartbroken that some six-figure earners are losing their share of the MID to other six-figure earners? In addition, Haneman cites projections that the 2017 legislation will shrink the overall size of the MID pie from $305 billion to $25 billion, which seems generally progressive, considering the MID’s main beneficiaries before and after the 2017 legislation. Finally, in light of the grandfathering of certain loans under the 2017 legislation and the potential for the MID to be capitalized into home prices, the primary inequities associated with these changes seem to fall within, rather than across, income cohorts. Overall, Haneman’s analysis highlights the challenges of distributional analysis and, to some extent, reinforces work by Daniel Hemel and Kyle Rozema that complicates these types of efforts with respect to the MID. There remains a certain temptation to look to other metrics, such as efficiency, when evaluating tax subsidies for homeownership.
The precise normative valence of the 2017 changes to the MID may matter less, however, if the MID is categorically undesirable. Under this view, we’re waiting for fundamental tax reform, and the sunset provisions of the 2017 legislation are a mechanism to facilitate its arrival. Haneman argues that the 2017 changes to the MID were politically possible only in the context of reductions in tax rates and other changes that diverted taxpayers’ attention from the popular deduction. Furthermore, the temporary nature of the 2017 changes may allow (or force) a future Congress to eliminate the MID—to “retrench an entrenched tax provision”—after people acclimate to a world in which many fewer taxpayers claim the benefit. This agenda-setting aspect of the 2017 legislation differentiates it from, say, the Tax Reform Act of 1986, which reformed personal interest deductibility while lowering individual rates and expanding the standard deduction.
Still, my inclination is that we’ll keep waiting for fundamental tax reform, notwithstanding the impending sunset of the individual portions of the 2017 legislation. Incremental and temporary changes may lower the political costs of permanent reform, but past experience with the Bush tax cuts indicates that the elected branches of government (and the macroeconomy) may remain uncooperative. So this game remains chancy and contingent—not great prospects if the MID should be repealed and replaced by Haneman’s housing credit. Another alternative, and one that seems more plausible, is that the MID could be iteratively squeezed into virtual nonexistence, a vestigial provision that lives in some small space between a growing standard deduction and a shrinking limitation on interest deductibility (and, perhaps, a revived phase-out for itemized deductions). There might be textual or legal complexity, but few individuals would see it through their TurboTax browser windows. Although not as optimistic as Haneman’s perspective, perhaps such a result is the best one can imagine for ill-conceived provisions with inexplicable persistence in the popular imagination.
In conclusion, Haneman provides a critical and insightful analysis of the 2017 legislative changes that affected the MID. By explicitly considering the temporary aspect of these changes, Haneman’s analysis bridges legislative and policy analyses of the new law. Haneman’s paper should be of interest to tax experts as well as those interested in the legislative process more generally.