An Analysis of the Geographic Distribution of
the Mortgage Interest Deduction
Mark P. Keightley
Specialist in Economics
January 30, 2014
Congressional Research Service
7-5700
www.crs.gov
R43385
An Analysis of the Geographic Distribution of the Mortgage Interest Deduction
Summary
This report analyzes variation in the mortgage interest deduction tax expenditure across states.
Tax expenditures, such as the mortgage interest deduction, can generally be viewed as
government spending administered via the tax code, or as tax incentives that are intended to
achieve particular policy objectives. Regardless of the interpretation, tax expenditures provide a
benefit to qualifying taxpayers by lowering their federal tax liabilities. Recent proposals to
change the mortgage interest deduction could affect how its benefits are distributed.
Understanding how the deduction’s benefits are currently distributed across taxpayers in different
states may help Congress in assessing the potential impact on constituents from a particular
policy change.
Currently, a homeowner may deduct the interest they pay on a mortgage that finances a primary
or secondary residence as long as they itemize their tax deductions. The amount of interest that
may be deducted is limited to the interest incurred on the first $1 million of combined mortgage
debt and the first $100,000 of home equity debt ($1.1 million total). If a taxpayer has a mortgage
exceeding $1 million they may still claim the deduction, but they must allocate their interest
payments appropriately to ensure that only the interest associated with the first $1 million of debt
is deducted. The Joint Committee on Taxation (JCT) has consistently estimated the mortgage
interest deduction to be one of the largest tax expenditures.
The results of the analysis presented in this report indicate that the benefits of the mortgage
interest deduction are not distributed uniformly across the states. A number of reasons that likely
explain why the variation exists are discussed, including differences in homeownership rates,
home prices, state and local tax policies, and area incomes. The data used in this report, however,
are unable to isolate and quantify the effect each one of these factors has on the variation across
states.
In recent years a number of proposals to modify the mortgage interest deduction have emerged.
Some proposals would reduce the maximum mortgage amount on which the mortgage interest
deduction could be taken, presumably to better target potential new homeowners and moderate
income taxpayers. Other proposals have suggested converting the deduction to a tax credit. A
credit would provide the same dollar-for-dollar benefit to claimants regardless of income, and
would not require itemization. Still other proposals would preserve the provision as a deduction,
but limit the rate at which higher income taxpayers could deduct interest.
Analysis of several of the more frequently proposed changes suggests that some of them may
provide a benefit that is more uniformly distributed. For example, limiting the size of mortgages
that qualify for the deduction could reduce some of the variation that is caused by regional
differences in home prices. Replacing the deduction with a credit, or limiting the rate at which
interest could be deducted, could reduce variation in benefits caused by differences in area
incomes. Still, it is important to understand that any change to the mortgage interest deduction
would likely require careful consideration over how to transition to the new policy to minimize
disruptions to the housing market and overall economy.
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An Analysis of the Geographic Distribution of the Mortgage Interest Deduction
Contents
Introduction ...................................................................................................................................... 1
Background ...................................................................................................................................... 1
Data Analysis ................................................................................................................................... 2
Tax Expenditure Per Capita ....................................................................................................... 2
Share of Tax Filers Claiming the MID ...................................................................................... 4
Share of Homeowners Claiming the MID ................................................................................. 5
Tax Expenditure Per MID Claimant .......................................................................................... 6
Reasons for the Variation in MID Beneficiaries ........................................................................ 7
Homeownership Rates......................................................................................................... 8
Home Prices ........................................................................................................................ 9
State and Local Taxes .......................................................................................................... 9
Incomes ............................................................................................................................... 9
Policy Options and Considerations ................................................................................................ 10
Retain the Current Deduction .................................................................................................. 10
Eliminate the Deduction .......................................................................................................... 10
Limit the Deduction ................................................................................................................. 12
Replace the Deduction with a Credit ....................................................................................... 13
Figures
Figure 1. Mortgage Interest Deduction Tax Expenditure Per Capita, 2012 ..................................... 3
Figure 2. Percentage of Tax Filers Claiming the Mortgage Interest Deduction, 2011 ..................... 5
Figure 3. Percentage of Homeowners Claiming the Mortgage Interest Deduction ......................... 6
Figure 4. Mortgage Interest Deduction Tax Expenditure Per Claimant ........................................... 7
Figure 5. Homeownership Rates in 2011 ......................................................................................... 8
Tables
Table A-1. Statistics on Mortgage Interest Deduction Tax Expenditures, by State ....................... 15
Table B-1. Distribution by Income Class of Mortgage Interest Deduction Tax
Expenditure, at 2012 Rates and 2012 Income Levels ................................................................. 18
Table B-2. Estimated Average Tax Rates for Purposes of Allocating the Mortgage Interest
Deduction Tax Expenditure to States .......................................................................................... 18
Appendixes
Appendix A. Tabular Presentation of Report Data ........................................................................ 15
Appendix B. Data and Estimate Methodology .............................................................................. 17
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Contacts
Author Contact Information........................................................................................................... 19
Acknowledgments ......................................................................................................................... 19
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An Analysis of the Geographic Distribution of the Mortgage Interest Deduction
Introduction
This report presents data on the geographic distribution of the mortgage interest deduction (MID)
tax expenditure. Tax expenditures can generally be viewed as either government spending
administered via the tax code, or tax incentives that are intended to achieve particular policy
objectives. Regardless of the interpretation, tax expenditures such as the mortgage interest
deduction provide a benefit to qualifying taxpayers by lowering their federal tax liabilities. For
this reason, and because policy makers have expressed interest in increasing equity in the tax
code, it is important to understand how the benefits of the mortgage interest deduction are
distributed.1 Additionally, understanding how the benefits of the deduction are currently
distributed across taxpayers in different states may help Congress in assessing the potential
impact on constituents from a particular policy change.2
Background
Currently, a homeowner may deduct the interest paid on a mortgage that finances a primary or
secondary residence as long as they itemize their tax deductions.3 The amount of interest that may
be deducted is limited to the interest incurred on the first $1 million of combined mortgage debt
and the first $100,000 of home equity debt ($1.1 million total). If a taxpayer has a mortgage
exceeding $1 million they may still claim the deduction, but they must allocate their interest
payments appropriately to ensure that only the interest associated with the first $1 million of debt
is deducted.
The value of the deduction generally increases with a taxpayer’s income. There are two primary
reasons for this. First, the value of the mortgage interest deduction, like all deductions, depends
on an individual’s marginal tax rate. For example, an individual in the 25% marginal tax bracket,
paying $10,000 in mortgage interest, would realize a reduction in taxes of $2,500 ($10,000
multiplied by 25%). In comparison, for someone in the 35% tax bracket the reduction in taxes for
deducting the identical amount of interest would be $3,500 ($10,000 multiplied by 35%). Second,
higher-income individuals tend to purchase more expensive homes, which results in larger
mortgage interest payments, and hence, a larger deduction.
Although many contend that the purpose of the mortgage interest deduction is to promote
homeownership, this was not the deduction’s original purpose. When laying the framework for
the modern federal income tax code in 1913, Congress recognized the importance of allowing for
the deduction of expenses incurred in the generation of income, which is consistent with
traditional economic theories of income taxation.4 As a result, all interest payments were made
1 For example, Senate Finance Committee Chairman Max Baucus and House Ways and Means Committee Chairman
Dave Camp stated jointly “For the good of our economy, and for the sake of making the tax code simpler and fairer for
families, Congress needs to come together to realign the tax code.” https://taxreform.gov/why-reform.html.
2 While there are other distributions that might be of interest to policy makers (e.g., across income levels), analysis of
these other distributions is beyond the scope of this report.
3 The alternative to itemizing one’s tax deduction is to claim the standard deduction.
4 Sen. William Borah, Congressional Record, August 28, 1913, p. S3832.
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deductible with no distinction made for business, personal, living, or family expenses.5 It is likely
that no distinction was made because most interest payments were business related expenses at
the time and, compared to today, households generally had very little debt on which interest
payments were required—credit cards had not yet come into existence and the mortgage finance
industry was in its infancy. Among those that did hold a mortgage, the majority were farmers.
For more than 70 years there was no limit on the amount of home mortgage interest that could be
deducted. The Tax Reform Act of 1986 (TRA86; P.L. 99-514) eventually restricted the amount of
mortgage interest that could be deducted and limited the number of homes for which the
deduction could be claimed to two. Mortgage interest deductibility was limited to the purchase
price of the home, plus any improvements, and on debt secured by the home but used for
qualified medical and educational expenses.6 Subsequently, the Omnibus Budget Reconciliation
Act of 1987 (P.L. 100-203) resulted in the basic deduction limits that exist today.
In recent years a number of proposals to modify the mortgage interest deduction have emerged.
Some proposals would reduce the maximum mortgage amount on which the mortgage interest
deduction could be taken, presumably to better target potential new homeowners and moderate
income taxpayers. Other proposals have suggested converting the deduction to a tax credit. A
credit would provide the same dollar for dollar benefit to claimants regardless of income, and
would not require itemization. Still other proposals would preserve the provision as a deduction,
but limit the rate at which higher income taxpayers could deduct interest. Specific proposals are
presented and analyzed later in this report, after analysis of the data.
Data Analysis
The Joint Committee on Taxation (JCT) has estimated that the mortgage interest deduction
reduced federal tax revenues by $68.5 billion in FY2012.7 This implies that individuals claiming
the mortgage interest deduction realized a benefit of the same magnitude in the form of reduced
taxes. The following analysis seeks to describe how this benefit is distributed across states using a
variety of statistical measures. Because the JCT does not produce tax expenditure estimates on a
state-by-state basis, an approach that accounts for state-level differences in incomes and in
amounts of mortgage interest deducted was used to allocate the JCT’s national expenditure
estimate to the states. Appendix A presents the data contained in this section in tabular form. A
summary of the allocation method and data sources may be found in the Appendix B.
Tax Expenditure Per Capita
Figure 1 displays the estimated per capita mortgage interest deduction tax expenditure for each
state. The data presented in the figure may be interpreted in one of two ways: (1) the amount of
federal spending per person in each state that is attributable to the mortgage interest deduction
5 U.S. Congress, Senate Committee on the Budget, Tax Expenditures: Compendium of Background Material on
Individual Provisions, committee print, prepared by Congressional Research Service, 110th Cong., 2nd sess., December
2008, S. Prt. 110-667 (Washington: GPO, 2008), p. 330.
6 Ibid.
7 U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures For Fiscal Years 2012-2017,
committee print, 113th Cong., 1st sess., February 1, 2013, JCS-1-13 (Washington: GPO, 2013).
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that is administered through the tax code; (2) the average reduction in federal tax liability realized
by individuals in each state from allowing mortgage interest to be deducted. Nationwide, the
average per capita tax expenditure in 2012 was $219.
Figure 1. Mortgage Interest Deduction Tax Expenditure Per Capita, 2012
Source: CRS estimates.
Notes: See Appendix B for discussion of methodology.
Figure 1 shows that variation exists between the states in the benefit they receive from the
deduction. To account for differences in populations, Figure 1 displays the tax expenditure data
in per capita terms. The residents of Mississippi and West Virginia were the smallest per capita
beneficiaries of the mortgage interest deduction. Residents in Mississippi received on average
about $87 in mortgage interest deduction tax expenditures in 2012, while West Virginians realized
a slightly larger benefit of $88 per person. In contrast, the residents of the District of Columbia
were the largest beneficiary with a per person tax expenditure estimate of $426, followed by
residents of Maryland with a benefit of $414 per person. Stated differently, the per capita benefit
in the District of Columbia and Maryland is estimated to be nearly five times the per capita
benefit in Mississippi and West Virginia. The results are similar when the 10 smallest per capita
beneficiary states are compared to the 10 largest per capita beneficiary states. Residents of the 10
smallest beneficiary states received an average of $106 per person in mortgage interest deduction
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tax expenditures while residents of the 10 largest beneficiary states averaged $350 per person, or
nearly 3.5 times as much per person.8
Figure 1 also highlights where the largest and smallest beneficiary states are located. The benefits
are most highly concentrated along the mid-Atlantic and northeastern coastal states, and the west
coast. Several other states scattered throughout the country also are among the largest
beneficiaries, such as Colorado, Hawaii, Illinois, and Minnesota. The states receiving the least
benefit per person are mostly found in the Midwest and Southern regions of the country, as well
as portions of the Southwest and Northwest.
Share of Tax Filers Claiming the MID
Another way to examine the mortgage interest deduction is to look at the distribution of tax filers
claiming the deduction. The deduction was claimed on 25% of tax returns nationally. However,
there was considerable variation in claim rates across the country (see Figure 2). For example,
South Dakota and North Dakota had the lowest claim rates, with 14% and 15% of their tax filers
claiming the deduction, respectively. The highest claim rates were found in Connecticut, where
33% of filers claimed the deduction, and Maryland, where 35% of filers claimed it. Generally,
claim rates were highest along the west coast and portions of the east coast. Tax filers in several
western states, such as Colorado, Idaho, and Utah, and Midwestern states such as Illinois,
Minnesota, and Wisconsin also claimed the deduction at rates higher than the national average.
8 The 10 largest beneficiaries were California, Colorado, Connecticut, D.C., Hawaii, Massachusetts, Maryland, New
Jersey, Virginia, and Washington. The 10 smallest beneficiaries were Arkansas, Iowa, Kentucky, Louisiana,
Mississippi, North Dakota, Oklahoma, Ohio, South Dakota, and West Virginia.
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Figure 2. Percentage of Tax Filers Claiming the Mortgage Interest Deduction, 2011
Source: CRS calculations using Internal Revenue Service’s 2011 Statistics of Income (SOI),
http://www.irs.gov/uac/SOI-Tax-Stats---Historic-Table-2.
Share of Homeowners Claiming the MID
Some may have the impression that all homeowners benefit from the mortgage interest deduction.
In fact, only about half of all homeowners nationally (48%) claim the deduction, as shown in
Figure 3. Several factors may explain why some homeowners do not claim the deduction,
including not having a mortgage, low mortgage payments (either from being towards the end of
the mortgage period or due to living in a low cost area), or living in a state without an income tax.
These factors are discussed in greater detail below.
The distribution of homeowners who claim the mortgage interest deduction generally mimics the
distribution of tax filers who claim the mortgage interest deduction. States such as Louisiana,
Mississippi, North Dakota, South Dakota, and West Virginia had the lowest percentage of
homeowners who claimed the deduction. Homeowners on the west coast and parts of the mid-
Atlantic and northeastern states had some of the highest claim rates, as did Colorado, Utah, and a
handful of other states scattered across the country.
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Figure 3. Percentage of Homeowners Claiming the Mortgage Interest Deduction
Source: CRS estimates.
Notes: See Appendix B for discussion of methodology.
Tax Expenditure Per MID Claimant
Figure 4 displays geographic distribution of the mortgage interest deduction tax expenditure per
claimant for each state. The data show that Americans claiming the mortgage interest deduction
saved approximately $1,906 in taxes on average in 2012. Given the variation in tax filers
claiming the mortgage interest deduction and variation in the percent of homeowners claiming the
deduction, it is not surprising that Figure 4 indicates that there is variation across the country in
the benefit received by those claiming the deduction. Claimants in D.C. received the largest
average benefit ($3,272) as the result of the deduction, followed by homeowners claiming the
deduction in California ($2,974). At the other end of the spectrum, homeowners in Ohio who
claimed the deduction received the smallest average benefit ($891), followed by Iowa claimants
($1,177). Stated differently, on average, D.C. tax filers who claimed the deduction realized a
reduction in their tax liability that was nearly four times that of claimants in Ohio.
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Figure 4. Mortgage Interest Deduction Tax Expenditure Per Claimant
Source: CRS estimates.
Notes: See Appendix B for discussion of methodology.
More generally the distribution shown in Figure 4, like the previous two, is skewed toward
particular geographic areas of the country. Claimants in the mid-Atlantic states, as well as those
on the northeast coast, typically benefited the most. The same is true for most of the west coast
(although, beneficiaries in Oregon received less than the national average). Homeowners in
Colorado and Utah, as well as Alaska and Hawaii, were also some of the largest beneficiaries of
the deduction. Claimants in the Midwest and southern states were generally those who benefited
the least from the deduction.
Reasons for the Variation in MID Beneficiaries
There a number of factors that are likely contributing to the state variation in the various
mortgage interest deduction tax expenditure figures presented thus far. Isolating and quantifying
the precise effect each factor may have on how many homeowners in a state claim the deduction
or on the average benefit received from the deduction is complicated by the interaction of the
various factors and the use of state-level data. Still, it is useful to highlight general differences
among states that are likely contributing to the variation. Understanding what is causing variation
in the benefits bestowed by the mortgage interest deduction is helpful in analyzing potential
policy changes.
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Homeownership Rates
Since the mortgage interest deduction is only available to homeowners, variation in
homeownership rates will naturally contribute to variation in which tax filers claim the deduction
and therefore who benefits from the deduction. Figure 5 shows that homeownership rates varied
across states from a low of 41.2% in D.C. to a high of 72.8% in Minnesota in 2011.9
Homeownership rates appear to be lowest in several states that have a concentration of their
population in relatively higher cost-of-living areas such as New York, California, and Hawaii, and
highest in less densely populated and lower cost-of-living areas such as Iowa, West Virginia,
Delaware, and Wyoming.
Figure 5. Homeownership Rates in 2011
Source: CRS estimates using the U.S Census Bureau’s 2011American Community Survey,
http://www.census.gov/acs/.
Notes: The homeownership rate for each state is defined as the number of owner occupied units divided by the
total number of occupied units.
All else equal, states with higher homeownership rates should expect to see higher claims rates
because more taxpayers would be eligible for the deduction. How well variation in the
9 Homeownership rates displayed in Figure 5 may be below average historical levels in some states that were
particularly hard hit by the Great Recession.
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homeownership rate explains variation in the average amount of interest homeowners deduct or
the average tax savings realized from the deduction is less clear. Two states could have different
homeownership rates, but have similar average home prices and incomes, resulting in
homeowners in both states deducting similar amounts of interest on average. Of course, all else is
not equal in reality and other factors influencing the claims rate may also be interacting with the
decision to become a homeowner, which in turn will influence how many people benefit from the
deduction.
Home Prices
Area home prices contribute to the variation in the mortgage interest deduction data in two
primary ways. First, homeowners are more likely to claim the deduction in higher priced areas
since higher home prices generally require larger mortgages, and hence more interest to be paid.
Correspondingly, higher home prices will also result in a larger average benefit from claiming the
deduction because of the larger amounts of deductible interest. Thus, homeowners in two
different states that are otherwise identical expect for the price of their homes will benefit
differently from the deduction. Home prices are typically lower in less populated markets than in
densely populated areas and metropolitan markets.10 Thus, higher average home prices along the
east and west coasts likely explain some of the concentration of mortgage interest deduction
beneficiaries.
State and Local Taxes
Variation in state and local taxes, particularly state income and property taxes, likely contributes
to variation in the mortgage interest deduction data.11 Only homeowners who itemize their
deductions can claim the mortgage interest deduction. An individual will only itemize if his or her
itemized deductions exceed that of the standard deduction. As state and local income and property
taxes increase, all else equal it becomes more likely that homeowners will claim the mortgage
interest deduction. Nine states currently have no broad-based income tax, including Alaska,
Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
These states accounted for roughly 20% of all homeowners in the United States, with Florida and
Texas combining to account for 14% of all homeowners. Florida and Texas both are ranked in the
10 least likely states where tax returns claim the mortgage interest deduction, and the 20 least
likely states where homeowners claim the deduction.
Incomes
Area incomes also influence the decision to claim the deduction. Higher area incomes will
support higher home prices, which implies greater mortgages and higher interest payments. But
higher incomes also imply that the same dollar of mortgage interest deducted will be more
valuable than the same dollar deduction at a lower income level. Thus, all else equal, markets
with higher incomes should be expected to have a higher claim rate.
10 Home prices can even vary greatly within a state. Other factors that influence the decision to claim the mortgage
interest deduction can also vary within states. This is one of the reasons it is particularly difficult to use state-level data
to isolate the effects the various factors have on the decision to claim the deduction.
11 For more on state and local taxes, see CRS Report RL32781, Federal Deductibility of State and Local Taxes, by
Steven Maguire.
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Policy Options and Considerations
There are a number of options available to Congress regarding the mortgage interest deduction.
This section presents several of the options that are most frequently discussed. It is important to
note that any change to the mortgage interest deduction would likely require careful consideration
of how to transition to the new policy so as to minimize disruptions to the housing market and
overall economy. Depending on its design, a policy modification could result in a more evenly
distributed benefit to homeowners.
Retain the Current Deduction
One option available to Congress is to leave the deduction in its current form. The deduction is
popular among homeowners as well as industry groups such as the National Association of
Realtors, National Association of Homebuilders, and Mortgage Bankers Association.
Additionally, the deduction is commonly thought to promote homeownership, which may
produce desirable social spillovers. The economic research on the ability of the deduction to
increase homeownership and produce social spillovers, however, generally suggests that the
deduction does not achieve the often stated policy objective of increasing homeownership. This
issue is discussed in greater detail in the next section.
Leaving the mortgage interest deduction unaltered would result in continued differences across
states in the deduction’s beneficiaries. States with higher homeownership rates, home prices, and
average incomes would continue to benefit the most on average. This could be of concern to
some if tax expenditures are viewed as government spending administered via the tax code since
the spending would continue to be distributed unevenly (in per capita terms). If Congress decides
to assist homeowners via the tax code, several alternatives to the mortgage interest deduction may
accomplish that objective in a more equitable, and possibly efficient, manner.
Eliminate the Deduction
Congress could eliminate the mortgage interest deduction. This option can be evaluated along
several dimensions, starting first with its effect on the tax treatment of taxpayers. The variation in
the claims rates and benefit value documented in this report suggests that eliminating the
deduction could help promote a more uniform tax treatment across taxpayers. Eliminating the
mortgage interest deduction would result in two homeowners, who are equally situated in terms
of financial resources but who are located in different states, being treated more equally for tax
purposes. Eliminating the mortgage interest deduction would also result in equally positioned
homeowners and renters being treated similarly by the tax code.
Elimination of the deduction can also be evaluated by its effect on economic performance or its
contribution to improving economic efficiency. Elimination of the deduction could improve the
overall performance of the economy if the deduction is currently leading labor and capital to be
allocated to less productive uses in the owner-occupied housing sector. A number of studies have
found that owner-occupied housing is generally taxed favorably compared to other sectors in the
economy.12 Elimination of the deduction would be a step in the direction of creating more
12 See, for example CRS Report RL34229, Corporate Tax Reform: Issues for Congress, by Jane G. Gravelle; A Joint
(continued...)
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uniformity in the tax treatment of various sectors, which would assist in a more efficient
allocation of resources across the economy. The increase in federal revenue from eliminating the
deduction could also improve the long-term budgetary situation of the United States, implying
less reliance on deficits to finance spending.
Additionally, elimination of the deduction can be analyzed by examining the potential effect on
the homeownership rate. Economists have identified the primary barrier to homeownership to be
the high transaction costs associated with a home purchase—mostly resulting from the down
payment requirement.13 Because the deduction does not directly address the largest barrier to
homeownership, and also because the deduction is not well targeted to the group of potential
homebuyers most in need of assistance—lower-income households, which includes younger first-
time buyers who do not itemize—the effect of eliminating the deduction is likely to be small in
the long run.14
While elimination of the deduction may in the long run lead to improved economic efficiency
with potentially little effect on the homeownership rate, careful consideration would still be
required to minimize the likelihood of short-run negative consequences. For example, sudden
elimination of the deduction could cause a drop in home demand, leading to a decrease in home
prices. The decrease in home prices would impose capital losses on current owners and perhaps
produce a lock-in effect—current homeowners could be reluctant to sell at a loss. In addition, the
decrease in home prices could lead to a reduction in new home construction, a reduction in
homeowner wealth, and the possibility of higher defaults since some homeowners could find
themselves underwater on their mortgages. These three events could lead to a negative impact on
the broader economy in the short run.
Gradually phasing out the deduction over time could help mitigate the negative consequences for
the economy and housing market. Researchers Steven Bourassa and William Grigsby propose
eliminating the deduction over a 15- to 20-year period with a fixed date after which the deduction
would no longer be available.15 For example, if January 1, 2034, were chosen as the cut-off date,
taxpayers who buy a home in 2014 could claim the deduction for 20 years, buyers in 2015 could
claim the deduction for 19 years, and so on. Bourassa and Grigsby postulate that there would be
no effect on home demand or prices, although no modeling is done to support their proposal. It is
possible that gradually eliminating the deduction could simply delay the negative short-term
(...continued)
Report by The White House and the Department of the Treasury, The President’s Framework For Business Tax
Reform, February 2012, http://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Framework-
for-Business-Tax-Reform-02-22-2012.pdf; and Congressional Budget Office, Taxing Capital Income: Effective Rates
and Approaches to Reform, October 2005, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/67xx/doc6792/10-18-
tax.pdf.
13 See for example, Peter D. Linneman and Susan M. Wachter, “The Impacts of Borrowing Constraints,” Journal of
the American Real Estate and Urban Economics Association, vol. 17, no. 4 (Winter 1989), pp. 389-402; Donald R.
Haurin, Patrick H. Hendershott, and Susan M. Wachter, “Borrowing Constraints and the Tenure Choice of Young
Households,” Journal of Housing Research, vol. 8, no. 2 (1997), pp. 137-154; and Mathew Chambers, Carlos Garriga,
and Donald Schlagenhauf, “Accounting for Changes in the Homeownership Rate,” International Economic Review,
vol. 50, no. 3 (August 2009), pp. 677-726.
14 For an more in depth analysis and discussion of the effects of the mortgage interest deduction on homeownership, see
CRS Report R41596, The Mortgage Interest and Property Tax Deductions: Analysis and Options, by Mark P.
Keightley
15 Steven C. Bourassa and William G. Grigsby, “Income Tax Concessions for Owner-Occupied,” Housing Policy
Debate, vol. 11, no. 3 (2000), pp. 521-546.
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consequences for the economy and housing market. This could happen if households do not
anticipate the full effects of the deduction’s elimination until closer to the chosen cut-off date.
Limit the Deduction
In between retaining the deduction and eliminating the deduction is the option of limiting its
scope. Currently, the mortgage interest deduction may be claimed on interest paid on up to $1
million of mortgage debt that finances a primary or secondary residence or interest paid on up to
$100,000 of home equity debt (which may be used to finance spending unrelated to the home). It
is available every year the mortgage is in repayment. There have been concerns that the rather
high mortgage limit and the ability to deduct interest on home equity debt may be providing a tax
benefit to taxpayers who would have become homeowners regardless of its existence.
To increase the target effectiveness of the deduction it could be limited to interest paid on a
mortgage amount that more closely resembles that of a first-time homebuyer. In 2009, the
Congressional Budget Office (CBO) estimated the revenue effect of gradually reducing the
maximum mortgage amount on which interest can be deducted from $1.1 million to $500,000.16
The CBO option would not take effect for four years (2013 at the time the report was published),
and would decrease the maximum mortgage amount by $100,000 annually until it reached
$500,000. The CBO estimates this option would raise a total of $41.4 billion between enactment
(2013) and 2019.
Another option would be to leave the maximum mortgage amount unchanged, but limit the
amount of interest that could be deducted. For example, the amount of interest that a taxpayer
may deduct could be limited to a percentage of their adjusted gross income (AGI), such as 10%,
12%, or 15%. The CBO has offered a similar option for another tax benefit for homeowners—the
deduction for state and local property taxes.17 A more general cap on all itemized deductions has
also been the subject of recent discussions.18
Limiting the deduction would likely help lessen the interstate variation in the mortgage interest
deduction. As discussed, a portion of the variation is attributable to differences across states in
income levels. States with higher average incomes should, all else equal, expect to benefit more
from the deduction; itemization is more frequent with higher income households, higher incomes
can support larger mortgages, and higher incomes imply a higher deduction value per dollar
deducted. Placing limits on the amount of interest that can be deducted should help to decrease
the variation to some degree, although deductions in general will typically display some variation
simply because they increase in value as incomes increase.
16 Congressional Budget Office, Budget Options Volume 2, August 2009, p. 189, http://www.cbo.gov/ftpdocs/102xx/
doc10294/08-06-BudgetOptions.pdf.
17 Congressional Budget Office, Budget Options Volume 2, August 2009, p. 190, http://www.cbo.gov/ftpdocs/102xx/
doc10294/08-06-BudgetOptions.pdf.
18 For more information, see CRS Report R43079, Restrictions on Itemized Tax Deductions: Policy Options and
Analysis, by Jane G. Gravelle and Sean Lowry.
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Replace the Deduction with a Credit
Another option available to Congress is to replace the mortgage interest deduction with a tax
credit. The current deduction tends to provide a proportionally bigger benefit to higher-income
homeowners since they buy more expensive homes and are subject to higher marginal tax rates.
The requirement that homeowners itemize their tax returns also limits the number of owners who
receive the tax benefit. A tax credit for mortgage interest could provide a benefit to more
homeowners since itemization would no longer be required. A credit, unlike the current
deduction, would have the same dollar-for-dollar value to a homeowner regardless of income,
creating a more consistent rate of subsidization across homeowners. Making the tax credit
refundable would serve to make it better targeted to lower-income homeowners.
Over the years, several mortgage interest tax credit options have been proposed. Five of the more
prominent ones are listed below. All five would limit the deduction to a taxpayer’s principal
residence. Four out of the five would allow a 15% credit rate. Three of the five credit options
would be nonrefundable. Two of the options would limit the size of the mortgage eligible for the
credit to $500,000, while one would limit eligible mortgages to no greater than $300,000 (with an
inflation adjustment). Another option would limit the maximum eligible mortgage to 125% of the
area median home prices. And still another would place no cap on the maximum eligible
mortgage, but would limit the maximum tax credit one could claim to $25,000.
• The CBO, in its most recent Options for Reducing the Deficit report, presented
the option of converting the mortgage interest deduction to a 15% nonrefundable
tax credit.19 The credit would be restricted to a taxpayer’s primary residence. No
credit would be allowed for interest associated with home equity loans. Under
this option, the deduction would still be available between 2014 and 2018 as the
credit was phased in. Simultaneously, the maximum mortgage amount that would
be eligible for the credit would be reduced by $100,000 during the phase in.
From 2019 on, only the credit could be claimed on mortgage amounts up to
$500,000. A similar option was presented by the CBO in 2009.20
• The American Enterprise Institute’s Alan Viard has proposed converting the
deduction in a 15% refundable tax credit starting in 2015.21 The credit would be
limited to the interest on the first $300,000 of mortgage debt (in 2013 dollars)
associated with one’s primary residence (second homes and home equity debt
would be excluded). The qualifying mortgage amount would be adjusted
annually for inflation. Homeowners could still claim the deduction but only at
90% of its current value, decreasing by 10% annually. A homeowner could
switch to the tax credit regime at any time.
• President Obama’s National Commission on Fiscal Responsibility and Reform
(Fiscal Commission) recommended replacing the mortgage interest deduction
19 Congressional Budget Office, Options for Reducing the Deficit: 2014 to 2023, November 2013, p. 115,
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44715-OptionsForReducingDeficit-2_1.pdf
20 U.S. Congress, Congressional Budget Office, Budget Options Volume 2, August 2009, p. 187, http://www.cbo.gov/
ftpdocs/102xx/doc10294/08-06-BudgetOptions.pdf.
21 Alan D. Viard, “Replacing the Home Mortgage Interest Deduction,” in 15 Ways to Rethink the Federal Budget, ed.
Michael Greenstone, Max Harris, Karen Li, Adam Looney, and Jeremy Patashnik (The Hamilton Project, 2013), pp.
45-49.
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with a nonrefundable credit equal to 12% of the interest paid on mortgages of
$500,000 or less.22 The credit would be restricted to a taxpayer’s primary
residence. No credit would be allowed for interest associated with home equity
loans.
• The Bipartisan Policy Center’s Debt Reduction Taskforce, co-chaired by former
Senator Pete Domenici and former CBO Director Alice Rivlin, proposes a 15%
credit for up to $25,000 of interest paid on a mortgage associated with a principal
residence—interest paid on home equity loans, and second homes would be
ineligible.23 The tax credit would be refundable, which would help lower-income
homeowners, who would be allowed to take advantage of the credit. The
proposed credit would be administered via mortgage lenders who would apply
for the credit and transfer it to homeowners by lowering their interest payments
in an amount equal to the credit.
• In 2005, President George W. Bush’s Advisory Panel on Federal Tax Reform
(Tax Reform Panel) also proposed replacing the mortgage interest deduction with
a credit.24 Specifically, the Tax Reform Panel proposed a tax credit equal to 15%
of mortgage interest paid. Under the proposal, the credit would be restricted to a
taxpayer’s primary residence. The size of the mortgage for which claiming the
interest credit would be limited to 125% of median home price in the taxpayer’s
region. It appears from the Panel’s report that the credit would be nonrefundable.
22 The National Commission on Fiscal Responsibility and Reform, The Moment of Truth, Washington, DC, December
2010, p. 31, http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/
TheMomentofTruth12_1_2010.pdf.
23 The Debt Reduction Task Force, Restoring America’s Future: Reviving the Economy, Cutting Spending and Debt,
and Creating a Simple, Pro-Growth Tax System, Bipartisian Policy Center, Washington, DC, November 2010, pp. 35-
36, http://www.bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
24 The President’s Advisory Panel on Federal Tax Reform, Simple, Fair, and Pro-Growth: Proposals to Fix America’s
Tax System, November 2005, http://www.treasury.gov/resource-center/tax-policy/Documents/Simple-Fair-and-Pro-
Growth-Proposals-to-Fix-Americas-Tax-System-11-2005.pdf.
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Appendix A. Tabular Presentation of Report Data
Table A-1. Statistics on Mortgage Interest Deduction Tax Expenditures, by State
Percentage of
Percentage of
Tax Filers
Homeowners
Mortgage
Mortgage Interest
Claiming the
Claiming the
Interest
Deduction Tax
Mortgage
Mortgage
Deduction Tax
Expenditure Per
Interest
Interest
Expenditure
Homeownership
State
Capita
Deduction
Deduction
Per Claimant
Rate
AK $223
21%
48% $2,067 63%
AL $138
22% 36% $1,439 70%
AR $101
18%
30% $1,310 67%
AZ $208
26%
48% $1,875 64%
CA $352
26%
65% $2,974 55%
CO $300
31%
59% $2,043 64%
CT $360
33%
64% $2,224 67%
DC $426
24%
73% $3,272 41%
DE $255
29%
54% $1,808 72%
FL $173
18% 37% $1,899 67%
GA $198
26%
53% $1,611 65%
HI $278
23% 59% $2,556 57%
IA $129
24% 38% $1,177 72%
ID $151
26% 44% $1,371 69%
IL $229
27% 52% $1,779 67%
IN $130
22% 38% $1,290 70%
KS $147
23% 41% $1,374 68%
KY $119
23%
38% $1,202 69%
LA $112
17% 30% $1,493 66%
MA $336
30%
63% $2,238 62%
MD $414
35%
70% $2,398 67%
ME $151
25%
40% $1,282 71%
MI $162
24% 42% $1,408 72%
MN $261
31%
53% $1,710 73%
MO $148
24%
40% $1,379 68%
MS $87
17% 29% $1,198 70%
MT $146
23%
40% $1,336 68%
NC $182
27%
47% $1,512 67%
ND $108
15%
27% $1,455 66%
NE $135
23%
41% $1,249 67%
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Percentage of
Percentage of
Tax Filers
Homeowners
Mortgage
Mortgage Interest
Claiming the
Claiming the
Interest
Deduction Tax
Mortgage
Mortgage
Deduction Tax
Expenditure Per
Interest
Interest
Expenditure
Homeownership
State
Capita
Deduction
Deduction
Per Claimant
Rate
NH $269
29%
53% $1,808 71%
NJ $354
31% 65% $2,320 65%
NM $138
20%
35% $1,554 68%
NV $205
22%
52% $1,941 56%
NY $231
22%
55% $2,134 54%
OH $104
24%
44% $891
67%
OK $110
19%
32% $1,326 67%
OR $228
30%
58% $1,665 61%
PA $187
24% 44% $1,598 69%
RI $230
29% 59% $1,626 61%
SC $157
24% 41% $1,474 69%
SD $103
14% 27% $1,439 68%
TN $133
19%
33% $1,582 67%
TX $148
19%
39% $1,756 63%
UT $199
31%
59% $1,550 69%
VA $372
32%
60% $2,478 67%
VT $165
24% 41% $1,366 71%
WA $304
29%
56% $2,246
63%
WI $171
33%
51% $1,253 68%
WV $88
15%
22% $1,395 72%
WY $173
21%
35% $1,788
71%
U.S. $219
25%
48% $1,906 65%
Source: CRS estimates.
Notes: CRS estimates based on the data cited in Appendix B.
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Appendix B. Data and Estimate Methodology
The data used in this report came from the four sources listed below. All data are for year 2011
except for the JCT’s aggregate tax expenditure estimate for the mortgage interest deduction. The
methodology for producing the state-by-state distributional estimates (described below) required
use of the JCT’s estimate of the mortgage interest deduction tax expenditure by income.
Unfortunately, there was no such distributional estimate for 2011, but there was one for 2010 and
2012. The 2012 distributional estimate was used because it likely better reflects the current state
of the housing market.
1. The 2011 American Community Survey produced by the U.S Census Bureau
(http://www.census.gov/acs/).
• Housing unit data and mortgage status data, by state.
2. The 2011 Population Estimates produced by the U.S. Census Bureau
(http://www.census.gov/popest/data/historical/2010s/vintage_2011/index.html).
• Population estimates.
3. The 2011 Statistics of Income produced by the Internal Revenue Service
(http://www.irs.gov/uac/SOI-Tax-Stats---Historic-Table-2).
• All individual tax filer related data, by state.
4. The Joint Committee on Taxation, Estimates Of Federal Tax Expenditures For
Fiscal Years 2012-2017 (https://www.jct.gov/).
• Mortgage interest deduction tax expenditures estimates for 2012.
The estimate for the geographic distribution of the mortgage interest deduction tax expenditure
was produced using an approach developed by economist Martin A. Sullivan.25 Sullivan’s method
accounts for both differences in incomes across states—and therefore, differences in tax rates—
and differences in the amount of interest deducted in each state.
The first step is to compute national “average marginal” tax rates for various income groups. The
tax rates were calculated by first consolidating the income classes used by the JCT in their
distributional estimates so that they matched the smaller number of income classes in IRS’s
Statistics of Income (SOI) data. The JCT’s distributional estimates are reproduced in Table B-1.
Next, the JCT expenditure estimate for each income class was divided by the amount of mortgage
interest deducted in each income class as reported in the SOI data. This produced an estimate of
the national “average marginal” tax rate for each income class.
25 Martin A. Sullivan, “Mortgage Deduction Heavily Favors Blue States,” Tax Notes, January 24, 2011, pp. 364-367.
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Table B-1. Distribution by Income Class of Mortgage Interest Deduction Tax
Expenditure, at 2012 Rates and 2012 Income Levels
Mortgage Interest Deduction
Income Class
Returns (thousands)
Amount (millions)
Below $10,000
1
$1
$10,000 to $20,000
177
$48
$20,000 to $30,000
489
$235
$30,000 to $40,0000
997
$585
$40,0000 to $50,000
1,792
$1,151
$50,000 to $75,000
5,799
$5,906
$75,000 to $100,000
6,081
$7,567
$100,000 to $200,000
14,065
$29,068
$200,000 and over
4,701
$23,606
Total 34,102
$68,166
Source: Joint Committee on Taxation, Estimates Of Federal Tax Expenditures For Fiscal Years 2012-2017,
https://www.jct.gov/publications.html?func=startdown&id=4503.
For each state, the tax rates were then multiplied by the amount of mortgage interest deducted in
each respective income class and then summed. Finally, the tax rates were increased uniformly
until the aggregate summed amount exactly matched the JCT’s aggregate tax expenditure
estimate. This produced an estimate of each state’s share of the JCT’s mortgage interest deduction
tax expenditure estimate. The estimated tax rates produced by this approach are reported in Table
B-2.
Table B-2. Estimated Average Tax Rates for Purposes of Allocating the Mortgage
Interest Deduction Tax Expenditure to States
Income Class
Estimated Tax Rate
Below $50,000
3.31%
$50,000 to $75,000
10.21%
$75,000 to $100,000
13.02%
$100,000 to $200,000
24.82%
Above $200,000
37.11%a
Source: CRS calculations using Internal Revenue Service’s 2011 Statistics of Income (SOI) http://www.irs.gov/
uac/SOI-Tax-Stats---Historic-Table-2 and Joint Committee on Taxation, Estimates Of Federal Tax Expenditures For
Fiscal Years 2012-2017, https://www.jct.gov/publications.html?func=startdown&id=4503.
Note:
a. This estimated tax rate exceeds the highest marginal tax rate for this income group (35%) for several
reasons. First, the definitions of income used in the JCT estimates and the IRS data are not identical.
Second, the JCT data used to in the tax rate calculation are estimates. Third, as explained in the
methodology description, the tax rates presented here were adjusted to ensure that the aggregate
estimates allocated to the states matched exactly the JCT’s aggregate tax expenditure estimate.
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Author Contact Information
Mark P. Keightley
Specialist in Economics
mkeightley@crs.loc.gov, 7-1049
Acknowledgments
James C. Uzel, Geospatial Information Systems Analyst, produced the figures presented in this report.
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