That’s not fair!” – How many times have you heard that cry from a child?
I created a “dadism” about that years ago. I would reply, “I know, life’s not fair then you die.”
Every day since the announcement of the proposed tax legislation, there are many variations of this reply to the elimination of the deduction for State and Local Income Taxes, Property Tax, and Sales Tax.
Those losing the deduction are the people that have been subsidized by nearly two-thirds of Americans. The renters are the ones that should be crying out that it is not fair.
Those crying out, “That’s Not Fair” include the National Association of Realtors. They strongly oppose eliminating the mortgage interest deduction, claiming, “Housing is the engine that drives the economy and to even mention reducing the tax benefits of homeownership could endanger property values. Home prices, particularly in high-cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented.”
When you look at the claim of the National Association of Realtors you immediately know that nearly every time a house sells they get paid. That in my mind creates bias.
A scientific look would be to examine the facts and conclude our truth versus accepting their bias.
Those Pesky Facts
- The interest deduction increases homeownership – FICTION
Homeownership in the USA is approximately 63% versus Canada at 68.4%. There is no deduction for interest in Canada, yet the homeownership in Canada is higher.
- All homeowners have the same tax benefit. – FICTION
Economists have demonstrated that high-cost high-income areas receive most of the tax benefit. For example, San Francisco, California receives $26,385 per home while El Paso, Texas receives $2,153 per home, a 1,225% difference.
- Renters subsidize home ownership and are the ones paying for your McMansion in the burbs – FACT How does that happen? Look into the lives of the Renters and the Owners.
Renters vs Owners
The Renters – Buddy and Leila live in uptown and rent a $2,000 per month apartment. Together they make $150,000 in wages and have two children ages 8 and 6. They have $77,000 in savings for a future down payment earning 3% per year. ($2,310)
The Owners – Anthony and Louise live in the suburbs and have a $2,000 per month mortgage payment on the house bought on January 2 this year. The house cost $385,000 and they made a 20% down payment. The monthly payment on the 4% 30-year mortgage is $1,470.44 plus $135.00 for homeowners insurance and $394.56 totally $2,000. Anthony and Louise also have two children ages 8 and 6. They both earn $75,000.
The only difference between “The Renter’s” and “The Owners” is the deductions for interest and property tax and the income earned on The Renter’s savings.
The calculation of income taxes for both of our couples based on the 2016 Tax Laws result in “The Owners” paying $1,666 less in federal income tax. “The Renters” subsidize the home ownership. Would you walk across the street and give your neighbor $1,666 just cause? Or would you rather save your money for your future?
One last additional fact to consider. According to www.statisticbrain.com in 2015 62.2% of Americans owned a home. In the USA 42.28% of those owning a home had no mortgage. That means that the renters and those without a mortgage were subsidizing the 35.9% of Americans with a mortgage.
If you take the other deductions for state and local income tax, and you will find the same answer that states without these deductions are doing the same kind of subsidizing.
Who should be crying out “That’s Not Fair?”
I am in favor of a simpler, straightforward tax system where we all pay and every citizen benefits.
What do you think?
Michael Tannery CPA, CDFA® AIF®
Be A Financial Olympian