Can Mortgage Interest Deductions boost homeownership?

Tax deduction on mortgage interest paid by home buyers, coming under high-end property market segment are happily enjoyed by hundreds of thousands of Americans.  The homebuilding and real estate industry circles say the deduction is an important part of promoting homeownership. Yet financial experts have long questioned the link between homeownership and tax subsidies provided all-around.

In this context, a study by Harvard economist Edward L. Glaeser in 2002 found that the interest deduction encouraged people to borrow more for housing, but found it had minimal impact on the rate of homeownership.

How the homebuyers searching for a suitable property feel about this unexpected incentive? Most said their choice of home would not have changed, even if the tax concessions were not available, but they would have searched elsewhere for cutting their consumption. And several homeowners said they did not consider the tax break, when they shopped for a mortgage and the incentive came as a bonus.

Yet there is apprehension in the minds of many, who availed these tax breaks that the government may take them back at any time. According to Rep. Sam Johnson, R-Plano, there may be pressure coming to the government to scale back tax concessions, as part of a budget-deficit reduction measure. He is a senior Republican on the House Ways and Means Committee and so his saying “Many of these tax expenditures are very popular, and doing away with them might hurt you at home” gets importance.

What is the opinion from the other law makers? Dogget, a senior Democrat on the tax-writing Ways and Means Committee says the most drastic policy option – wiping out all tax breaks – is hardly politically feasible. According to the Tax Policy Center, it would not raise enough revenue to reduce deficits to a sustainable level, if Congress, as expected, extends most of the Bush tax cuts.

However, economists and lawmakers say a more likely solution for this would come from a comprehensive tax reform effort. Reducing existing tax breaks could raise enough revenue that individual and corporate rates could be lowered, making the whole effort more appealing to voters.

It is expected more ideas could come from a bipartisan fiscal commission, appointed to advise Congress on ways to cut the deficit. Let us wait and see.

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