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FAQs on the Need to Reform Oregon’s Biggest Housing Subsidy: The Mortgage Interest Deduction

Fact Sheet
March 21, 2017

Lawmakers have an opportunity to take a bold step in confronting Oregon’s housing crisis, which is wreaking havoc on the lives of many Oregonians and communities across the state. That opportunity is House Bill 2006, which would enact a common-sense reform of the state’s biggest housing subsidy, the mortgage interest deduction.

The following answers frequently asked questions regarding the Oregon mortgage interest deduction and HB 2006.

Questions on the Mortgage Interest Deduction

Why is reforming the mortgage interest deduction so important?

What is the mortgage interest deduction?

Is the mortgage interest deduction a federal or a state program?

Why is the mortgage interest deduction a housing subsidy?

Related materials:

Learn more about the Mortgage Interest Deduction and the proposed reforms at OCPP's MID Remedy webpage.

Is the mortgage interest deduction Oregon’s biggest housing subsidy?

Why is reform of the mortgage interest deduction one of the actions being considered to address the statewide housing crisis?

Who can use the mortgage interest deduction?

How many Oregonians benefit from this housing subsidy?

Does it subsidize someone who purchases a mansion?

Who benefits the most from the mortgage interest deduction?

Why do most of the benefits go to the well-off?

Why does the mortgage interest deduction fail to promote homeownership?

Does the mortgage interest deduction exacerbate racial and ethnic inequality?

Does the mortgage interest deduction exacerbate the urban-rural economic divide?

Questions on House Bill 2006

How does HB 2006 propose to reform the mortgage interest deduction?

How will Oregon use additional tax revenue resulting from these reforms?

Why won’t the money from the reforms go to plug the state’s revenue shortfall?

Will Oregonians still be able to take the federal mortgage interest deduction?

Does HB 2006 leave the deduction unchanged for the vast majority of taxpayers?

How would the proposed reforms impact rental homes?

How would the typical homebuyer in Portland fare under HB 2006?

How would a family buying a home worth $600,000 be affected?

What happens if interest rates go up?

Why is reforming the mortgage interest deduction so important?

The number of homeless school children is at a higher level than seen during the depths of the recession. Rising prices are preventing many families from buying their first home. This problem is not just in Portland and other hot markets. Rural counties in Oregon are some of the nation’s least affordable rural counties. Meanwhile, the state’s biggest housing subsidy, the mortgage interest deduction, is doing nothing to alleviate the crisis. The mortgage interest deduction is ineffective mainly because it subsidizes those who least need help owning a home: Oregonians at the top of the income ladder.

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What is the mortgage interest deduction?

The mortgage interest deduction is a tax subsidy for some homeowners. It allows some taxpayers who own a home to reduce their taxable income by the amount of interest paid on their mortgage and thus lower their tax bill.

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Is the mortgage interest deduction a federal or a state program?

It is both. Currently, Oregon’s mortgage interest deduction mirrors the federal deduction. It is Oregon’s choice, however, whether to allow the deduction and how to do so. HB 2006 would only reform the state mortgage interest deduction.

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Why is the mortgage interest deduction a housing subsidy?

By lowering the personal income taxes of the homeowners who claim it, the mortgage interest deduction theoretically lowers the cost of owning a home.

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Is the mortgage interest deduction Oregon’s biggest housing subsidy?

Yes. Oregon’s mortgage interest deduction is projected to cost the state almost $1.1 billion in the upcoming budget cycle (2017-19). To put that in perspective, in 2015, the Oregon legislature committed $40 million in general obligation bonds to build new affordable housing for low-income families. That was a one-time investment. In the upcoming budget period, the mortgage interest deduction will cost 25 times the amount of the bond investment. Furthermore, the mortgage interest deduction repeats every budget period, unless the legislature takes action.

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Why is reform of the mortgage interest deduction one of the actions being considered to address the statewide housing crisis?

While the mortgage interest deduction is money that Oregon has already committed to spend on housing, it is not helping with the crisis. The bulk of the money subsidizes those who do not need help affording a home. By reforming the deduction, Oregon can better focus the subsidy and redirect the savings to efforts that address the housing crisis.

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Who can use the mortgage interest deduction?

To claim the deduction, a taxpayer must own a home, have mortgage interest expenses, and itemize deductions on their federal and state tax returns. By definition, the housing subsidy excludes Oregonians who rent. It also excludes homeowners who do not itemize deductions — typically those with lower incomes.

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How many Oregonians benefit from this housing subsidy?

Less than one-third (30 percent) of Oregon taxpayers claimed the mortgage interest deduction in 2013.

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Does it subsidize someone who purchases a mansion?

Taxpayers can deduct interest paid on mortgage debt of up to $1 million on a principal home, or even a second home, or up to $1 million for mortgages on a first and second home combined. They can also deduct interest up to $100,000 on a home equity loan. In other words, taxpayers can end up subsidizing people who can afford payments on a $1.1 million combined mortgage and home equity loan balance.

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Who benefits the most from the mortgage interest deduction?

The mortgage interest deduction mainly benefits the well-off. If you divide all Oregon taxpayers into five groups according to income, the highest-earning fifth together collected 61 percent of all the tax savings from the mortgage interest deduction in 2013. The bottom two-fifths (the lowest-earning 40 percent of all taxpayers) together received less than 3 percent of the tax benefits.

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Why do most of the benefits go to the well-off?

There are several reasons. First, the mortgage interest deduction only helps homeowners, and higher income earners are more likely to own a home than lower income earners. Second, the subsidy only helps those who itemize deductions, and they are disproportionately higher income earners. Third, higher income earners are more likely to buy a more expensive home, and thus take on a bigger mortgage that gives them more tax benefits from the higher interest deduction. And fourth, because it is a deduction from taxable income, not a credit against taxes, it is more valuable to those with more income in the top tax brackets — the wealthy. In other words, a high-income household with the same mortgage payment as a middle-income household will get a greater subsidy from the deduction because the high-income household pays taxes at a higher tax rate. Dollar-for-dollar of interest, the deduction is worth more to high-income households.

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Why does the mortgage interest deduction fail to promote homeownership?

There is wide consensus among economists and housing experts that the mortgage interest deduction fails to promote home ownership. Oregon ranks 45th among states and the District of Columbia in homeownership rates, at 61 percent, despite having one of the nation’s highest mortgage subsidies. Furthermore, among the 10 states with an income tax that do not offer a mortgage interest deduction, eight had homeownership rates higher than the national rate over the five-year period ending in 2015. Despite its expensive subsidy program, Oregon ranked below the national average in homeownership. It also ranked below all but one of the states that levy an income tax but offer no mortgage interest deduction. The lack of an association between homeownership and the mortgage interest deduction make sense, considering that the subsidy is structured to primarily benefit those who do not need help affording a home — the well-off.

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Does the mortgage interest deduction exacerbate racial and ethnic inequality?

Yes. For historical reasons, communities of color have significantly lower rates of homeownership, are less likely to have a mortgage, and have lower incomes. Accordingly, they are far less likely to be able to benefit from the mortgage interest deduction.

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Does the mortgage interest deduction exacerbate the urban-rural economic divide?

Yes. Almost nine out of 10 mortgage interest deduction dollars flow to taxpayers in urban counties. Every rural county in Oregon gets a smaller share of the mortgage interest deduction dollars as compared to its share of all Oregon taxpayers.

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How does HB 2006 propose to reform the mortgage interest deduction?

HB 2006 would reform the deduction in three key ways. It would:

  1. Limit the mortgage interest that can be deducted on state taxes to $15,000, and increase the cap each year based on the Consumer Price Index (CPI).

  2. Eliminate the deduction of interest paid for mortgages on second homes.

  3. Eliminate the deduction for higher income households — specifically, joint filers with adjusted gross income above $200,000 per year, and single filers with adjusted gross income above $100,000.

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How will Oregon use additional tax revenue resulting from these reforms?

HB 2006 directs the revenue savings, estimated at about $290 million in the 2017-19 biennium, to three dedicated accounts at the Oregon Department of Housing and Community Services. The revenue would be directed in the following ways:

  1. Home Ownership Assistance Account (50 percent of revenue, estimated at about $145 million per biennium): This account invests in homeownership opportunities for Oregonians with low and moderate incomes (up to 80 percent of median family income). These investments include down payment assistance, homebuyer education classes, and development of single-family homes.

  2. General Housing Account (25 percent, estimated at about $73 million): This account protects and expands the supply of housing for low-income Oregonians. Among other things, the account provides grants to developers to build new, affordable multifamily housing. The account also enables the state to preserve existing affordable units that have been kept affordable with rental assistance contracts between the owner and the federal government. When those contracts expire, owners may choose to extend the contract, sell to a preservation-focused buyer, or raise rents to market rate. The General Housing Account provides financing for properties with expiring contracts to ensure they remain affordable for another 20 years or more.

  3. Emergency Housing Account (25 percent, estimated at about $73 million): This program assists low- and very low-income Oregonians who are homeless or at risk of becoming homeless with services such as emergency and transitional shelter, homelessness prevention, and rapid re-housing assistance.

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Why won’t the money from the reforms go to plug the state’s revenue shortfall?

The mortgage interest deduction is money that Oregon is already spending on housing. HB 2006 keeps that money in housing but spends it in a way that actually addresses the housing crisis. HB 2006 takes the housing subsidy that would go to the most well-off homeowners and redirects it to homeownership assistance, to increasing the supply of rental units, and to homelessness prevention.

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Will Oregonians still be able to take the federal mortgage interest deduction?

Yes. This proposal would only impact the Oregon tax deduction. The larger subsidy provided by the federal mortgage interest deduction would remain unchanged; homeowners who itemize on their federal tax returns would continue to be able to deduct the interest paid on mortgages on first and second homes up to a total of $1 million of indebtedness, plus the interest on home equity loans of up to $100,000. The federal deduction, which totaled $4.2 billion for Oregonians in the 2014 tax year, would remain untouched.

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Does HB 2006 leave the deduction unchanged for the vast majority of taxpayers?

Yes. The vast majority of Oregonians have incomes under $200,000 per year (for joint filers) and most do not own second homes. The average mortgage interest in Oregon is well below the HB 2006 threshold of $15,000. In 2013, the most recent year data is available, the average mortgage interest deducted was $8,670.

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How would the proposed reforms impact rental homes?

Owners of rental properties would not be affected by this proposal. Landlords deduct mortgage interest as a business expense. Vacation rental homes are not eligible for the mortgage interest deduction unless the homeowner uses the property at least 10 percent of the year. Should HB 2006 become law, owners of vacation rentals would still be able to deduct mortgage interest as a business expense for the period of time that they rent their property.

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How would the typical homebuyer in Portland fare under HB 2006?

The proposed reform would not affect the typical buyer in Portland. Consider the following scenario: A married couple making $95,000 per year buys their first home in Portland for $410,400 — the median home value in Portland, and well above the median home value of $299,400 for Oregon as a whole. The family puts down 16.8 percent — the average down payment in Oregon. In their first year, this couple would pay about $15,253 in interest on their new home. The proposed reforms would reduce their tax subsidy by less than $2 per month, leaving them with over $110 per month in subsidy.

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How would a family buying a home worth $600,000 be affected?

Consider the following scenario: A well-off Portland family making $180,000 per year is looking to upgrade to a larger residence. They find a house for $600,000 — about double the median home value in Oregon. They put 20 percent down from the proceeds of the sale of their first home. In the first year, this family would pay $21,442 in interest. Under the proposed reform, the family would be able to deduct up to $15,000 of that interest, thus receiving a housing subsidy worth just over $110 per month. Their subsidy would be about $48 less per month — less than the cost of taking a family out to dinner in Portland.

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What happens if interest rates go up?

Evidence suggests housing prices may stagnate or decline if interest rates on mortgages rise. Even if they don’t, the prospect of interest rates rising is a compelling reason to set a reasonable limit on how much mortgage interest that can be deducted. As presently structured, the mortgage interest deduction is effectively a blank check. Rising interest rates potentially increase the total cost of the mortgage interest deduction to the state, drawing revenue away from schools, affordable housing programs, and other key priorities.

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