A recent editorial criticized the House and Senate DFLers for raising taxes. What the editorial failed to mention is the fact that both the House and Senate cut spending more than the Governor. The editorial goes on to criticize a House plan that “eliminates deductions on…most astonishing – mortgage interest.” It’s unfortunate that the editorial board failed to do some homework on this House provision. A closer look reveals the truth about the mortgage interest deduction proposal.
First of all, the bill does NOT impact the federal mortgage interest deduction, which represents most of the tax benefit for homeowners. It only impacts the much smaller state portion, and in a positive way for most. The House tax bill converts the mortgage interest deduction into a credit so that all taxpayers qualify for an equal percentage tax benefit.
Consider the following scenarios:
A married couple, $40,000 of income, $75,000 home, and working hard to pay about $6000 in mortgage interest. They don’t have enough other deductions; therefore, they don’t itemize. Their current state tax benefit is $0. Under the House proposal they will get a credit of $140.
A married couple, two kids, $100,000 of income, $200,000 home – relatively modest for their income, paying about $13,000 a year in mortgage interest. Their current state tax benefit equals about $400. Under this proposal, they’ll get a credit of $420 or $20 more.
Married couple, two kids, $100,000 of income, paying about $25,000 in mortgage interest. Their current law gives them a state tax benefit of $1,180. Their home is worth twice as much as the first example but their state tax benefit is three times as big! Under this proposal, they’ll get the same $420 credit as the married couple in the $200,000 home. Under current law, the bigger the home, the higher the income, the bigger the benefit – the House proposal reforms this impact.
Married couple two kids, $500,000 of income, million-dollar home, paying mortgage interest of $60,000. Under current law they receive tax benefits of $1,750. Under the House proposal, they would receive $420.
The bill creates a credit that provides the same benefit for everyone, up to $10,000 of interest. The Senate tax bill does not include this proposal. They do have a provision that would eliminate the mortgage interest deduction on a second home. Fifteen states do not have a mortgage interest deduction at all. The House proposal is similar to what is currently in place in Wisconsin.
I am not sure what the final tax bill’s provisions regarding mortgage interest will look like when it arrives on the Governor’s desk. Given the enormous budget deficit facing the state, subsidizing $1 million mortgages is no longer affordable. I would hope the correct information regarding the House and Senate budget plans are reported accurately so proper discussion can ensue.