BLS Library Blog

An interesting paper on the history and future of the mortgage interest deduction (MID) is now available on SSRN thanks to University of California Davis School of Law Professor Dennis J. Ventry, Jr. This past summer, Prof. Ventry spoke at Brooklyn Law School’s Fourth Annual Jr. Tax Scholars Workshop on The American Nightmare: Tax Subsidies for Home Ownership. His new article, The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage Interest, tells the history of the MID from the first federal income tax law, the Revenue Act of 1913 (38 Stat. 114) which while not explicitly providing for an MID contained a general offset for “all interest paid within the year by a taxable person on indebtedness”. Prof. Ventry tells of several unsuccessful reform efforts that sought to eliminate the MID including the Tax Reform Act of 1969 (83 Stat. 487) and the Tax Reform Act of 1986 (100 Stat. 2085). The 1986 statute ended the deductibility of interest on credit card and other consumer loans but left the mortgage interest deduction in place.

The article also includes criticisms of the subsidy from two generations of tax reformers and tax policymakers that are more applicable today than at any time during the deduction’s nearly 100-year history including The Hidden Welfare State: Tax Expenditures And Social Policy in the United States by Christopher Howard (Call # HJ2381 .H684 1997) where the author identifies the MID, Social Security and Medicare as the three members of the “Holy Trinity of U.S. social programs”.

Prof. Ventry appeared on All Things Considered this past weekend to discuss the paper in a segment Is Tax Deduction For Home Mortgages A Bad Idea? A transcript of the interview is available at the site along with an audio file for the interview. Any effort to eliminate or even modify the deduction for mortgage interest is likely to generate strong opposition from real estate interests, like the National Association of Realtors and the National Association of Home Builders. History shows that with President Reagan and the Tax Reform Act of 1986 and with President Bush when his tax-reform advisory panel unsuccessfully urged restricting the MID. The issue will likely remain the “third rail” of tax reform as President Obama attempts to cap mortgage interest deductions on “higher income” households in his proposed budget. The Congressional Budget Office in its Overview of Federal Support for Housing estimates that the MID accounts for an estimated revenue loss of $80 billion in 2009. Members of Congress have already introduced bills and resolutions expressing opposition to efforts to modify the MID: Rep Leonard Lance (NJ-7) introduced H. Con. Res.130 expressing support for the current standards of the Federal mortgage interest tax deduction and Rep. Zach Wamp (TN-3) introduced H.R. 1805 to make the deduction for mortgage interest a permanent part of the tax code.

In a major setback for opponents of the Atlantic Yards development project in downtown Brooklyn, the 2nd Circuit Court of Appeals affirmed the dismissal of a complaint challenging eminent domain action on the grounds that it violated the Public Use Clause of the Fifth Amendment. See the NY Times article reporting the decision. The Court ruled in Goldstein v. Pataki that the plaintiffs failed to demonstrate that the project’s public benefit was a “pretext” to benefit Bruce Ratner, the private developer behind the project.

The plaintiffs challenged the condemnation as a private taking in violation of the Fifth Amendment and alleged that the “public uses” the state agencies advanced for the project were pretexts to benefit Bruce Ratner whose company first proposed it and who serves as the Project’s primary developer. The “pretext” argument was based on the Supreme Court’s decision in Kelo v. City of New London decided in 2005. The Court of Appeals rejected the “pretext” claim stating:

“We do not read Kelo’s reference to “pretext” as demanding, as the appellants would apparently have it, a full judicial inquiry into the subjective motivation of every official who supported the Project, an exercise as fraught with conceptual and practical difficulties as with state-sovereignty and separation-of-power concerns. Beyond being conclusory, the claim that the “decision to take Plaintiffs’ properties serves only one purpose” defies both logic and experience.

“At the end of the day, we are left with the distinct impression that the lawsuit is animated by concerns about the wisdom of the Atlantic Yards Project and its effect on the community. While we can well understand why the affected property owners would take this opportunity to air their complaints, such matters of policy are the province of the elected branches, not this Court.”

In the two years since the Kelo decision, many states have introduced eminent domain reform legislation in response to overwhelming public disapproval of the ruling. The effectiveness of those legislative efforts is questioned in a well researched article entitled The Limits of Backlash: Assessing the Political Response to Kelo by Ilya Somin. The article suggests that widespread political ignorance may contribute to the ineffectiveness of most eminent domain reforms. The plaintiffs challenging the Atlantic Yards development project are far from politically ignorant. Unless the Supreme Court takes their case and overrules Kelo, their struggle against eminent domain in this case seems over.