One of the obstacles to fundamental tax reform has always been that there is an entrenched constituency that benefits in some way from every provision in the tax code, and that can be counted on to noisily oppose any change to it. These constituencies are often not taxpayers themselves but business interests that have built a business on a particular tax provision.
An obvious example is the residential mortgage interest deduction. Tax purists argue that, because the tax code should be neutral and not attempt to manipulate behavior, a tax deduction designed specifically to encourage home ownership has no business in the tax code.
We’re sympathetic to that argument, but because so many Americans made home ownership and mortgage decisions based on the mortgage interest deduction, it has always seemed unlikely that the deduction would go away anytime soon.
Neither President-elect Donald Trump nor House Republicans are threatening the home mortgage interest deduction in their current tax reform plans. In fact, House Ways and Means Committee Chairman Kevin Brady (R-TX) has specifically promised to protect the deduction, and all tax bills must move through his committee. Indeed, there are much bigger tax reform fish to fry.
But that hasn’t stopped the real estate industrial complex from going to Defcon 3, according to a recent story in Politico. “We’re looking at the current draft plan as an assault,” Politico quotes the CEO of the National Association of Home Builders as saying.
Why would the real estate industry be so upset if the mortgage interest deduction isn’t being eliminated? Because current tax reform plans would increase the standard deduction available to taxpayers who choose not to itemize their deductions. In other words, the real estate industry has a targeted tax preference that is only available to home owners through the itemized deduction, and they don’t want to see that tax preference diluted by a higher standard deduction available to everyone else.
This is an obnoxious argument for the real estate industry to be making. Giving a higher standard deduction to those who do not itemize doesn’t take anything away from taxpayers who do, and it would simplify tax filing for many taxpayers because it would make the standard deduction more attractive.
Apparently the real estate industry doesn’t want Americans to get a tax break unless they agree to go into massive debt to buy a house.
The real estate industry has a reputation for power on Capitol Hill, but in this case it is making a very weak and offensive argument that should be dismissed. Increasing the standard deduction will be a welcome tax break and tax simplification for millions of Americans, and it is no threat to those who itemize and claim the mortgage interest deduction.