Finally a tax proposal I approve of (even though it would hurt me personally). There’s a commission that wants to lower the limit on mortgage tax deductions. But of course every elected official in California and New York is freaking out about it.
There has to be a way that this iniquitous tax break (and the one on health benefits) can be removed fairly so that those with the highest incomes don’t get most of the benefit. My proposal would be
1) Abolish all tax relief on second homes (currently you can get a deduction for mortgage payments on a second home with a mortgage of up to $1million)
2) Limit the deduction immediately to the interest on a mortgage that’s equivalent to the median house price in the CSMA (large metro area), so that the number would be bigger in San Francisco and New York, and smaller in Kansas, but then reduce that amount by 5% each year, phasing this out over 15-20 years. (Rather than gong straight to a "modest" house price and sticking with that ongoing)
That would immediately take away the advantage for the high income earners and restore some sanity to the housing market, as well as encouraging people to pay down their mortgages rather than borrow more against their homes for yet more consumer spending. But it wouldn’t be such a radical move that it would kill the housing market overnight and send us into a recession.
But the panel has come out with average costs that clearly ignore the realities on the ground in more expensive states — The new cap would be linked to Federal Housing Administration mortgage limits set county by county each year based on the cost of a "modest” home. Those limits range from $172,632 in low-cost states to $312,895 in the most expensive counties, such as Santa Clara. Around here the median house price is closer to $750,000.
The trick is getting this number to stall so that housing becomes more affordable, the tax iniquity is not just reduced but eliminated altogether, but that it’s one in a way that doesn’t penalize people in more expensive states and wreck the whole plan.
Still it’s amazing to see that this Administration has anything to do with a plan which doesn’t give extra benefits to the very rich.
And of course health benefit tax deductibility is next, as this Managed Care magazine article discusses. Note the extremely sensible comments from Alain Enthoven and Uwe Reinhardt at the end of the article.
UPDATE–An interesting wrinkle suggested by Uwe. If employers had to put the amount they spend on health insurance on the employees’ W2 would they put the average they spend, or what they actually spend per employee? Anyone who’s bought health insurance knows that a typical small company is quoted the amount per employee, so a 50 yr old person with a family costs a whole lot more than a 20-something single. Of course most employees don’t realize that. But to take this to its logical extreme for self-insured companies, "premium" costs per se don’t exist. Instead costs are exactly equal to the actual costs of care for each employee. So should their employees see the total amount spent on their care, and then be taxed on that? If you have a $100,000 hospital stay, should you pay tax on that money? More interesting conundrums to be worked out here too.
Adam. Insightful comment indeed. But no one (apart from Eric, Abby, me and you) seems to want to know about that debate. I do think changing the housing market is very touch, and it’s one of the few things that we spend a lot more on than health care (if you count in servicing mortgage debt and rent).
Mortgage and state-tax deductibility reform unlikely given powerful coalition of real estate industry and blue-state white collar workers.
There are 1+ million real estate agents out there (not to mention mortgage brokers, bankers, home builders, etc..) who stand ready and willing to stop any changes in mortgage interest deduction policy. Furthermore, blue state white collars get the big mortgage and state tax deductions, and they’ll trade pretty much anything to keep them (ie, supreme court nominees, ANWAR drilling, war in Iraq).
So, toss that one out.
Therefore, the solution is more likely to focus on health care deductibility. This break actually costs the treasury more than the mortgage one. Furthermore, I don’t see any strong constituencies in favor of the status quo. Yes, corporates would like to keep it, but they’ll give it up in exchange for plums like accelerated depreciation. Also, this issue is “purple” (ie, red and blue if I remember my colors correctly), so less like to get strong geographic resistance.
The question we must, therefore, ask is what will replace the current employer-sponsored “system”. I don’t know, but it’s worth thinking about if only because that’s where change is most likely to occur.
Mostly their proposals do benefit the rich, because they are limiting taxes on capital so much. They suggest cutting the top marginal rate to 33% and raising the 10% rate to 15%.
They do suggest something good on the home mortgage front. In addition to limiting the mortgage interest stuff to the interest on a more average home, they were also planning to change it from a credit to a deduction. 15% of the interest spent on a home would be credited. This is important, because it means that it doesn’t disproportionately benefit the well off in two ways. 1.) The value of a deduction is worth more to the well-off, because their marginal rates are higher. Thsi gives everyone the same 15% credit. 2.) It applies to people who don’t make enough to itemize their deductions.
Fat chance any of this will pass though.