Replacing federal tax deductions for mortgage interest with a tax credit could boost the nation’s homeownership rate, with particular benefits for low- and moderate-income homebuyers, according to a new study.
The analysis from Johns Hopkins University's Carey Business School renews a public debate about the deduction that goes back at least two decades. Advocates of scrapping the deduction say various changes to the federal tax code since the 1980s have made it less useful.
The deduction could be replaced with a 24% credit that doesn’t vary based on buyers’ income, said the study's authors, Michael Keane, who is a professor at the Carey Business School, and Xiangling Liu, of Australia’s University of New South Wales. The potential policy change would be revenue-neutral for the federal government, but increase homeownership by 5.9% as more people with modest incomes are incentivized to buy homes.
“It’s a popular idea on both sides, with both progressives and conservatives proposing this,” Keane said in an interview. “It just makes the system fairer.”
Keane pointed to three different bipartisan commissions active between 2005 and 2012 that recommended ending the deduction and replacing it with a credit.
The deduction costs the government about $30 billion annually, the Bipartisan Policy Center said in a 2023 report that cites the work of the three commissions. But rather than helping lower-income people buy homes, the report said, the deduction encourages wealthy people to buy larger ones. Eliminating the deduction would lead affluent people to buy smaller houses, leading to a slight drop in prices, the Johns Hopkins study says.
To be eligible for the existing mortgage interest deduction, owners have to itemize their taxes. The 2017 Tax Cuts and Jobs Act doubled the standard deduction, making it less attractive for many people to itemize. Previously, the 1986 federal tax reform bill created personal and child deductions that caused the mortgage interest provision to lose its luster. The proposed tax credit would be available whether taxpayers itemize or not.
There will probably be more discussion about replacing the deduction next year as Congress decides whether to extend the 2017 tax law and which provisions to amend, Keane said.