There’s a lot of talk in Washington about tax reform, but one of the most controversial components facing significant change is the mortgage interest deduction.

The MID allows homeowners to deduct the interest on mortgage balances less than $1 million on their first and second homes from their taxable income on their federal returns. Some say this deduction is critical to the housing market; others are outright skeptical of its economic value.

Wealthier taxpayers tend to buy larger homes with correspondingly bigger mortgages. Often those who can afford to pay cash for a home purchase will take out a million-dollar loan just for the tax deduction, while using the money that frees up for other investments.

Those in lower tax brackets often can’t take advantage of that loophole, giving the greatest benefit to the economic bracket that least needs it.

“Close to half of homeowners with mortgages – most of them middle- and lower-income families – receive no benefit from the mortgage interest deduction,” concluded a 2013 study from the Center on Budget and Policy Priorities.

About half of all homeowners have no mortgage and therefore can’t benefit from the MID at all, said Paul Willen, senior economist and policy advisor at the Federal Reserve in Boston. And for many homeowners who do have mortgages, it simply doesn’t make financial sense for them to itemize their deductions.

The Pew Research Center estimated the MID cost the federal government $77 billion in 2016.

Massachusetts mortgage holders are the seventh biggest beneficiaries of the MID in the country, according to The Tax Foundation; Bay State homeowners averaged $2,540 savings per tax return in 2015. The states that benefitted the least were Mississippi ($964), South Dakota ($867) and West Virginia ($856).

Multiple news outlets have recently reported Treasury Secretary Steve Mnuchin’s remarks that President Donald Trump will not eliminate the MID in his tax reform proposal, but his may not be the final say.

The National Association of Realtors opposes any change to the deduction, as does the Massachusetts Association of Realtors. MAR President Paul Yorkis said he doesn’t agree that the deduction disproportionately favors the wealthy, despite the fact that Willen said most economists agree it does.

“If you look at the cost of housing in Massachusetts, we are one of the most expensive states in which to purchase a home or condo,” Yorkis said. “You set a cap on a MID and what you are really doing is penalizing everyone in a state like Massachusetts or California, or in the suburbs of DC.”

The deductions are a significant means by which homes are made more affordable, he said, and the benefit of the deduction will increase for all borrowers as mortgage interest rates inevitably rise.

“I understand the tax code is very complex and I understand the motivation to try to simplify it and encourage economic expansion through lower taxes on business and industries,” Yorkis said.

“But what caused the most recent downturn was the collapse of the housing market because it’s so large. Why consider adopting a policy that could harm that economy? It doesn’t make sense.”
Willen countered that reducing or eliminating the MID would not have a catastrophic impact on home values and sales.

“In the short term, houses could become somewhat less valuable, but we don’t know how much,” he said. “It’s not clear it would impact the market in the long run. The value of real estate agents will still exist without the MID. [Homeownership] rates could dip, but there are a lot of reasons besides the MID why it makes sense for people to own a home.”

The MID wasn’t a designed to subsidize homeownership, he said; it’s a way for homeowners to take legitimate tax deductions similar to business expense deductions. It’s an imperfect system, that could be made more equitable in a number of ways.

“One thing is you could cap it,” Willen said. “Another way is to allow people to take a standard deduction and itemize mortgage interest. Another way would be to tax the imputed value of a home and allow deductions for the mortgage interest.”

Lexington-area Realtor Janet Terzano said she thinks the MID ought to be altered to make it more equitable, but she doesn’t trust Congress to get it right. She wants to maintain the MID and the ability to deduct property taxes on her federal return – something she said benefits her personally and the real estate market as a whole.

“If you don’t have the new people in the lower-priced markets, then there’s no one to move in to the higher-priced markets,” she said. “They may not rely on them personally, but those deductions are important to our buyers and sellers here.”

Terzano conceded that many homeowners in Lexington and surrounding communities might have bought their properties with or without these incentives. However, she points out that many first-time buyers in less-affluent communities rely on the deductions to purchase starter homes, allowing those homeowners to move up into more affluent communities.

“The other thing that worries me is all this talk makes people nervous and destabilizes the market,” she said. “It makes potential buyers think they should wait. I saw an article that predicted home prices would fall 7 percent if the MID is eliminated. Where did that number come from? The information is so vague.”

This article has been updated to correct the spelling of the last name of Paul Willen, senior economist and policy advisor at the Federal Reserve in Boston.