Market Urbanism

Liberalizing cities | From the bottom up

“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

Mortgage-interest tax deduction cuts on the table

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Urbanism doesn’t get a lot of breaking news (that is, unless Eric Fidler’s prediction pans out), but this might be an exception: the WSJ is reporting that Obama’s (bipartisan?) deficit commission is considering cutting the mortgage-interest tax deduction.  The reports are all very speculative, but it looks like they’re definitely not considering eliminating the tax break entirely.  While most libertarians have advocated eliminating the tax break (and in fact all tax breaks) completely and adjusting the general tax rates to make the measure revenue-neutral, it looks like this (along with cuts to the child tax credit, among others) is a cost-saving measure.

As I discussed earlier today, the tax credit is just one of many highly regressive government advantageous to wealthy homeowners – the vast majority of Americans don’t even itemize their tax returns, and therefore don’t benefit at all from the tax break.  Still, in spite of its regressiveness, it’s enormously popular among voters.

Leaving aside considerations of whether the savings should be used to pay down the deficit or to lower marginal rates, any move to limit this deduction would be a good thing for urbanism.  While the American ideal of the homeowner involved in a positive way in their community and schools is prevalent, I fear that the greater effect of increasing homeownership above the market equilibrium is to encourage NIMBYism by making people look at their home, rather than their wider community, as their biggest asset.  Furthermore, it puts people in the awkward position of desiring a rise in cost for one of life’s most essential needs, which clearly played a large role in the policies that led up to the subprime crash.

While this proposed change is certain to encounter fierce resistance from America’s real estate industry and wealthy, entrenched suburban interests, it is only a small step to correcting America’s pro-suburban bias.  Economists appear to agree that the tax credit does little to actually encourage homeownership (here’s Ed Glaeser), and completely doing away with the deduction doesn’t even appear to be an option, so it should be emphasized that the effects of the proposed reform will probably be minor.

  • Those are really good ideas. It’s much better to broaden the base than to raise tax rates. Special deductions and credits just distort markets; lower rates make productive businesses more likely to succeed.

  • Charley

    I agree that the tax incentive really distorts things, but I definitely think there’s a special place for urban home ownership. While it can breed some NIMBYism, as opposed to suburban homeownership urban home ownership is primarily an investment in a neighborhood. This is a simplified way of putting it, but In a suburb you’re buying a house for its sole equity in a relatively stable neighborhood. In cities today, you’re probably buying a house in an improving neighborhood, and are trying to capture the externalities thrown off by that rather than get priced out once the rent goes up.

  • Churnock

    I love the work you do on this blog, but I think you jumped the shark on this one. I don’t know why you frame this topic in a suburban/urban polemic. The deduction apply to all mortgages, not just those in the suburbs. Why you would advocate the repeal of said deductions base on the logic that it will increase urban reinvestment is beyond me. I get a deduction on my mortgage for my 1936 bungalow located close to the cities core (as if cities have core’s anymore). “While this proposed change is certain to encounter fierce resistance from America’s real estate industry and wealthy, entrenched suburban interests, it is only a small step to correcting America’s pro-suburban bias. ” I think it is a faulty conclusion to say suburban dwellers have mortgages and city dwellers do not. I agree the tax code needs some looking at, but this argument is a straw man.

  • Stephen Smith

    My argument isn’t that mortgages are only for suburban houses (although cities do have higher rates of renting, don’t they?), it’s that encouraging homeownership encourages NIMBYism, which discourages density and development.

    Of course, like I said, the tax break doesn’t actually encourage homeownership as much as you might think, but it does encourage people to buy bigger/more expensive homes than they otherwise would.

  • Daniel

    I’m on board with what you’re saying, except I want to point out that we currently have a deduction not a credit, which is different. In fact, one proposal out there is to replace the deduction with a similar kind of credit to ease away from it in a politically feasible way. The market distortions would still be there, but a credit would be more equitable. Anyone, regardless of how much you are paying in taxes can claim a credit (at least they can be set up that way).

  • Stephen Smith

    Thanks for the correction – I’ve edited the post to reflect it. And in case anyone’s interested in the difference between a credit and deduction, here’s one explanation.

  • Anonymous

    “..entrenched suburban interests..”

    people in cities don’t have mortgages?
    in fact, they are often larger than suburban ones

  • Htreswghyhge4

    65% is a “vast majority” now? That’s not even 2/3rds.

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