Eliminating the federal tax code’s deduction for mortgage interest could have a dramatically negative effect on jobs and economic growth if not paired up with other tax reforms to cushion the impact, according to a new study by the Tax Foundation. The mortgage interest deduction is one of the largest tax expenditures currently being reviewed in Congress for possible elimination as part of comprehensive tax reform legislation.
The Tax Foundation’s economic model finds that after the effects of eliminating the mortgage deduction are fully phased in, the economy would shrink by $254 billion, the nation would lose 659,000 jobs, and wages would be 1.1 percent lower. In addition, even though initial calculations call for $101 billion in additional federal revenue, a “dynamic” estimate taking into account long-term economic interactions predicts a much smaller actual revenue increase of $39 billion.
“The mortgage interest deduction is a controversial provision and there are legitimate policy arguments beyond just its impact on revenue for whether it should be retained or eliminated,” said Tax Foundation Fellow Dr. Michael Schuyler. “For the purposes of our estimate, however, we’ve set aside questions of encouraging home ownership or unequal investment treatment and focused on the impacts on economic growth.”
The negative impact of eliminating the deduction, however, could be mitigated by pairing it with tax cuts that would stimulate investment and growth. If the additional revenue were used to finance an across-the-board income tax cut of 6.8 percent and allow small businesses to immediately write off the cost of new equipment, the economy would grow by an additional $50 billion, overall federal revenues would increase by a modest $8 billion, and an additional 255,000 jobs would be created.
“The mortgage interest deduction is a dramatic reminder that as complex as the tax code is, simply eliminating major provisions is not necessarily the best solution,” said Tax Foundation President Scott Hodge. “The goal of tax reform is greater economic growth and prosperity for all Americans, and every proposed change should be focused on that goal.”