Comment by ProfessorLayton | Hacker News Reader

Comment by ProfessorLayton | Hacker News Reader

ProfessorLayton

The upcoming changes in the tax code certainly did not help the housing market:

- The new SALT cap is extremely low, particularly if you own a home in the Bay Area. 10K! Mitigative solution: Stay put and keep current tax base, hampering both supply and demand (for a nicer home)

- The doubled standard deduction made owning with a mortgage less attractive (But a win overall once your loan is paid off enough).

- Mortgage interest deduction lowered from 1M to 750K (I believe it's 1/2 if you're buying alone). Houses are so expensive here this actually matters. On the supply side: More post-tax money + higher interest rates means those who locked into great rates won't want to sell, or want to buy a more expensive home. On the demand side: All of the above means everything just got even more expensive.

EDIT: Regardless of what your stance is on mortgage interest deductions, there's no doubt that the upcoming tax code changes threw cold water onto the housing market.

This wouldn't be such an issue if there was more supply in the first place, but here we are.

This is all true, but the mortgage interest deduction should be $0, particularly in the rich cities that refuse to let enough homes get built and fix things like zoning. It's an awful distortion that's a handout to the wealthy to the penalty of renters (generally less well off)

It also encourages debt and is effectively a subsidy to banks

> It also encourages debt and is effectively a subsidy to banks

I have no idea who is downvoting you. That's absolutely correct.

If they really wanted to subsidize ownership they would make it tax deductible to pay down principal. (And then give you zero tax basis so it's all taxable income when you sell, and cap the maximum sunk deduction per person at the median home value so rich people don't buy twelve houses to avoid their taxes.)

I'm a homeowner and I think it's an absolute crime my mortgage interest is tax deductible yet rent isn't. If we believe, at a philosophical level, that interest payments should be tax deductible, ok, then make ALL interest paid tax deductible - credit cards, personal loans, auto loans, payday loans, etc.

It's shameful.

That being said, with the new tax bill, 90+% of both owners and renters will be taking the standard deduction this year. It is my opinion that's a good thing, it's my opinion the standard deduction should truly be standard. However, moving all the middle and upper middle class into taking standard deduction makes the mortgage interest deduction basically exclusively for the very wealthy.

Some states do permit tax deductions for rent. Indiana, New Jersey, and possibly others.

Looked into this real quick.

The maximum rental deduction in Indiana is capped at $3,000 and the income tax rate is a flat 3.23%. So a renter in Indiana only pays $97 less in taxes.

California has a (very small) tax credit for renters.

I believe it's only for lower income renters.

If we believe, at a philosophical level, that interest payments should be tax deductible, ok, then make ALL interest paid tax deductible - credit card, personal loans, auto loans, etc.

Exactly. In fact all interest was deductible until the 1986 tax reform. Unfortunately the mortgage interest deduction survived due to lobbying from the real estate industry.

with the new tax bill, 90+% of both owners and renters will be taking the standard deduction this year. It is my opinion that's a good thing.

It's a very good thing for fairness, economic efficiency, and saving taxpayer time.

The entire (expressly stared) reason to make mortgage interest deductable was to encourage more home ownership.

You may disagree that that’s a desirable policy goal (and I might agree with you), but comparing it to some other payment that isn’t deductable misses the point entirely. Especially rent. Congress wanted to create an economic dis-incentive to being a renter and push people to own the homes they live in.

> The entire (expressly stared) reason to make mortgage interest deductable was to encourage more home ownership.

IIRC it was actually to encourage more borrowing so that the banks could securitize and sell off the loans. Increased home "ownership" was/is the altruistic reason presented to the public so that they feel good about the whole thing. Not looking to start an argument here, but there are plenty of other ways to encourage "ownership" that don't require encouraging debt peonage and market inflation.

Also when credit cards were first becoming a mainstream thing, the interest on that was also tax deductible. I forget the specifics about why it was deemed acceptable to dispense w/that tax break.

Both that and the encourage home ownership theory seem unlikely when it comes to why it was deductible in the first place.

It became deductible in 1913, but simply because in 1913 all interest became deductible. The first $3k ($4k married) was excluded. Only the top 1% paid enough interest to take any deduction, and very little of that would have been mortgage interest because they usually bought their homes outright.

Wikipedia claims that the reason they made interest deductible on personal income taxes was that in a nation of small proprietors the line is fuzzy between personal and business expenses, and it was simpler to just make it all deductible instead of just trying to allow business interest to be deducted.

As for why credit card interest later became non-deductible, it is kind of the inverse of why mortgage interest is deductible. That is just as mortgage interest became deductible because all interest became deductible, credit card interest became non-deductible because almost all interest became non-deductible. The Reagan tax reforms took away almost all such deductions except the mortgage deduction.

As to why Congress decided to save the mortgage deduction when they were killing all the rest--I have no idea. That was in 1986, when a lot more than the top 1% were taking it, and most homes were bought using mortgages, so both the "encourage home ownership" theory and the "encourage more borrowing to please the banks" theories are plausible, at least.

I appreciate your digging into this. The 1913 tidbit is an interesting wrinkle.

I'd say, based on experience and conversations w/ elected officials, at the end of the day "encourage home ownership" is less likely to be a driver, but more so a selling point to the public.

I also seem to remember reading in a number of sources, one of Michael Lewis' books comes to mind, is that Lew Ranieri (and friends) is a probable reason for the deduction's survival if, as you suggest, there was any real discussion about cutting the MI deduction.

I can also tell you that NAR, for the more recent discussion about cutting the MI and SALT deductions would have been (and were) a significant factor in lobbying against changes that they would expect to slow sales.

Externally, lobbying is talked about as some sort of corrupting force to be excised. Internally, it's simply considered to be an integral part of the legislative process. IMHO, people should attribute less to altruism decisions that are likely linked to someone's lobbying efforts.

Thanks again.

Except it just makes it more difficult for people to actually own their home. Instead, it raises home prices by forcing people who would otherwise be happy renting in modest apartments or {du,quad}plexes into buying detached single-family homes in order to reap the mortgage deduction. And it's not like most of these mortgage holders are taking the loan for convenience's sake, to avoid selling off some art they're rather attached to, or their other home in Monaco. These are ordinary people who decide, based on this distortionary government policy, to take out 30 year loans that they really will need 30 years to pay off, if they can at all.

I remember when credit card interest was federally deductible.

State and local taxes should also not reduce your federal taxable income at all.

High tax states can tax themselves all they want to, but that shouldn’t reduce their federal tax burden.

Why not? The high tax states are also paying more in Federal taxes than they receive. The low tax states are already subsidized by the federal government.

The high tax states drive the federal tax policy and spending. When California and New York push large federal programs and higher federal taxes and then are able to exclude themselves from the cost it's wrong.

How can the high tax states push policy when they mostly elect Democrats and the Republicans control Congress? The tax law that just passed was very unfriendly to blue states.

> How can the high tax states push policy when they mostly elect Democrats and the Republicans control Congress?

The Republicans don't always control Congress, and the Democrats generally favor program expansions when they do have control.

Moreover, even when they're not in the majority, they're still in Congress. Even though the vote was mostly along party lines, the deciding vote on the Medicare expansion under Bush was a Democratic Congressman from New York.

And have a look at the parties of the Representatives from California and New York. A majority of their Representatives are Democrats but they still elect more Republicans than most states have Representatives.

That might be accidentally true in some case, but not true in principle. There are states like Washington, which have zero income tax but which still contribute more in federal taxes (73.3B [1]) vs federal spending they receive (72.9B [2]). So it still doesn't make sense to deduct local taxes.

[1] https://en.wikipedia.org/wiki/Federal_tax_revenue_by_state

[2] https://en.wikipedia.org/wiki/Federal_taxation_and_spending_...

last years appreciation, the lost deductions, rising rates have really stretched the limits of demand. how many households are really out there who can afford a 10k/month mortgage or 300k down payment that you need for a house in upper middle class parts of Bay Area or Seattle.

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