What happens to government revenue and the economy if the mortgage interest or property tax deductions are eliminated? A new, independent research study weighs in…
Two new case studies by the Tax Foundation, a non-partisan tax research group based in Washington, D.C., show that if dynamic analysis, which allows for behavioral change, is used to estimate effects eliminating the MID or property tax deductions raises less revenue for the government than expected and reduces GDP growth, leading to job loss and lower wages.
- Every year, the Joint Tax Committee (JCT) estimates the amount of revenue lost as a result of tax expenditures. A “tax expenditure” is basically a reduction in taxation as a result of a particular tax payer activity such as paying mortgage interest or property taxes.
- In its most recent estimate, the JCT finds that the tax expenditure as a result of the Mortgage Interest Deduction (MID) ranges from $69 to $84 billion each year from fiscal year 2012 through 2017, putting it regularly among the top 5 tax expenditures (along with employer-paid health insurance, lower rates on capital gains and dividends, exclusions for employer retirement contributions, to name a few) . The JCT finds that the deduction for property taxes paid results in an expenditure of $25 to $34 billion each year in the same period. Writers sometimes use these figures to suggest that government revenue might increase by an equivalent amount if the MID were to be eliminated, but that’s not the case because people will adjust behavior once a change is made to the law and expenditure estimates do not allow for any behavioral change.
- Two new case studies by the Tax Foundation, a non-partisan tax research group based in Washington, D.C., show that if dynamic analysis, which allows for behavioral change, is used to estimate effects eliminating the MID or property tax deductions raises less revenue for the government than expected and reduces GDP growth, leading to job loss and lower wages.
- What types of behavioral change might be expected as a result of the loss of housing-related deductions? The authors write: “the people affected would respond to the higher marginal tax rates by working and investing less. In addition, the higher cost of home ownership would somewhat reduce the value of the owner occupied housing stock, either through lower home prices or the building of smaller housing units over time.”
- How much less revenue does the model suggest the government will bring in? Eliminating the MID using a dynamic model is estimated to bring in only 40% of the federal revenue implied in a static model. This is consistent with other academic studies suggesting that the revenue to the government after adjustments is somewhere in the 25 to 84 percent range. The study finds that eliminating the property tax deduction raises only about a third of the revenue implied in a static analysis.
- If revenue neutral tax reform is pursued, that is, if the additional revenue from the elimination of these deductions is used to offset other taxes paid, then the studies find that the effects on government revenue and economic growth depend on the type of reforms undertaken. The study results suggest that using the revenue gain to reduce income tax rates only, as was recommended in the Simpson-Bowles reform plan, has a negative overall effect on government revenue and the economy—a loss of $107 billion in GDP per year and a reduction in federal revenues of $26 billion per year for the MID elimination. By contrast, the study results suggest that a combination of tax rate reduction and 100 percent expensing for all non-corporate businesses would have a positive effect on GDP and federal income tax revenue in spite of the elimination of deductions—an increase in GDP of $50 billion and federal revenue of $8 billion in the case of the MID.
- The tax study also places a magnitude on the rate reduction: 8.7 percent for full elimination of the MID, 6.8 percent for full elimination of the property tax deduction, and smaller reductions if income tax rate reductions are secondary to other tax reform priorities. To put these rate reductions in context, a table below lists the reduced tax rates next to the tax rate schedule for single filers in 2013.