The Mortgage Deduction is bad policy
The political consensus that it is a third rail is probably true, but I still think it is a good idea to separate good policy from bad in the ongoing discussions about tax reform. The argument for it is that home ownership is socially desirable, which is probably true, but the mortgage deduction is a bad way to do it. The deduction subsidizes debt, not ownership, creating incentives for borrowing even when the owner may have cash in the bank, and it also subsidizes home equity loans to purchase cars, or a vacation to the Bahamas. The person who pays cash for a house gets no tax subsidy, and the person taking out a $1 million mortgage gets a much larger subsidy than the person taking out a $200k mortgage, even though the social benefits of home ownership, if they exist, are probably similar for both owners. That is, while it may be socially valuable to have people own a home in the community, I am not sure why it is five times more socially valuable for them to have a mansion instead of a rambler.
If you want to subsidize home ownership, the way to do it is something like a $1000 refundable tax credit for owning a house in which you live. You get the credit whether or not you borrow or pay cash, and no matter the size of your mortgage.
I’m skeptical that there is a societal benefit to subsidizing home ownership that exceeds the societal and subsidy costs, but even setting that aside, your proposal suffers one of the major flaws as the mortgage interest subsidy — namely that the subsidy is given to people who would have bought their home without the subsidy. If the point is that we need to give a government subsidy to increase home ownership rates, then let’s focus on the subsidy where it actually has an impact. Cash buyers are far less likely to need a government subsidy to afford their home. Same with wealthy buyers who take out million dollar mortgages (perhaps without the subsidy they would buy a smaller, less expensive home — that has a societal/environmental benefit as well!).
Though I argue that no subsidies at all are called for at all, whatever subsidies are given should be targeted at those who actually need them to change their rent/own decision. Income tests are probably the best approximation for that, though a cap on mortgage interest deduction (set at the size of the mortgage, perhaps with some geographic variance — though this last bit is probably unconstitutional) would also do a decent job. Further, the deduction should only be available for purchase money mortgages (not equity lines), and limited to mortgages up to 80% of the value of the home being purchased (to discourage buying “too much” house).
Mind you, the mortgage interest deduction was worth $101 billion dollars to taxpayers in 2012. That’s $1 trillion in deficit reduction over 10 years by eliminating it. This is an expensive policy to get wrong.
You are referring to the problem of “buying off the base”. It is real, but exists on pretty much every government policy, is extremely hard to get rid of, and in the end flips very few policies to being unsound.
I agree that the social benefits of home ownership are nebulous, but there is a strong rationale for subsidizing things that do have a positive social impact, like education, vaccination, “pure” scientific research, etc. even though the “buying off the base” problem exists there as well.
A flat ownership subsidy would be far more beneficial than current debt subsidization, and be extremely easy to administer. It also would be much more politically acceptable than eliminating the mortgage deduction, would be more progressive in its tax incidence, and therefore probably raise revenue (albeit not by as much as elimination of the deduction itself).