Policy Documents

Goring the Wrong Ox: A Defense of the Mortgage Interest Deduction

Susan E. Woodward and John C. Weicher –
September 1, 1989

For many years the mortgage interest deduction was a sacrosanct part of tax code despite the frequently expressed opinion of many economists that it misallocated resources in favor of housing and was regressive besides. The inflation of the late 1970s drove the revenue loss from the deduction relentlessly upward; making it an increasingly visible target for tax reformers, and finally the Tax Reform Act of 1986 imposed the first limitations. TRA86 restricted the deductibility of interest to mortgage interest, including interest on second mortgages taken out for "worthy" purposes such as home improvements, medical expenses and education. Then the 1987 Budget Reconciliation imposed a maximum of $1.1 million-$l million of original mortgage debt plus $100,000 additional home equity debt-as the total amount of mortgage debt on which individuals could deduct interest. Perhaps heartened by these changes, many economists continue to advocate elimination of the deduction.