Wealthy (Dems) Enjoy the Greatest Mortgage Interest Benefits

A new article published Martin Sullivan at Tax Analysts (HT: TaxProf) puts an interesting political spin on the mortgage interest tax deduction (MID), a once ironclad tax measure that could be modified or repealed as part of coming budget reform efforts. According to Sullivan’s research, the biggest “beneficiaries” of the MID are Democrat-heavy states, while those that see the least from it are smaller, more rural Republican strongholds. From the piece:

The benefits of the mortgage interest deduction are not evenly distributed among the states. … [T]he per capita tax benefit from the mortgage interest deduction for Californians is more than two and a half times that for Texans. Marylanders get nearly five times the benefit of citizens in neighboring West Virginia.

In addition to the wide disparity in benefits, the other striking feature about the mortgage interest deduction is how well the subsidy correlates with Democratic strength. … Obama won the popular vote in 22 out of the top 26 jurisdictions, compared with 8 out of the 25 states with the lowest per capita benefits.

In economic terms, this isn’t news at all, as the states that enjoy the most in MID tax deductions have something else in common besides a fondness for the Democratic Party: high per capita income. Research has shown that the MID disproportionately benefits the rich because wealthier taxpayers are more likely to actually own a home (even if the deduction did not exist), more likely to itemize their deductions, and receive larger benefits due to the higher tax rates they face. It’s not surprising, then, that many of the states Sullivan mentions also rank among the highest in the country for income.

Though the push to get rid of the MID has garnered support from both libertarians/conservatives (because it distorts the housing market) and progressives (because it is not a very effective way to boost homeownership). Still, news like this may stick in the minds of Democratic legislators as tax and budget reform discussion heats up in the coming year.