After failing to make good on numerous campaign promises including, most dramatically, repealing and/or replacing the Affordable Care Act, the Trump administration has turned its attention to another touchy subject: tax reform.

In his speech upon accepting the Republican Party’s nomination for the presidency, then-candidate Donald Trump told the assembled crowd that “nobody knows the system better than me, which is why I alone can fix it.”

Characteristic exaggeration aside, tax reform is indeed an area of federal government that would benefit from an overhaul. But as Trump may have finally learned, he alone does not make the decisions or the rules. The current U.S. Congress is perhaps the most polarized and obstructionist it has ever been. Even those on both sides of the aisle who agree that tax reform is necessary will find it hard to come to an agreement on how to do it.

It is often said that in a successful negotiation, neither party is happy with the result; no one will be happy with the outcome of tax reformation, but more importantly, it has the potential to harm.

Potentially on the chopping block is the mortgage interest rate deduction, or MID. The MID has its supporters and detractors. Notably, the real estate community has come out strongly in favor of retaining the MID in its current form; economists argue that the deduction benefits those who need it least, and costs the U.S. billions of dollars annually.

About half of all U.S. homeowners have no mortgage and cannot benefit from the deduction; of those who do have mortgages, close to half – most of them middle- and lower-income families – receive no benefit from the deduction.

So that leaves about 25 percent of the homeowning population that actually does derive a benefit from the deduction. Currently capped at a mortgage balance of $1 million, there are homeowners in higher income brackets that most certainly take advantage of the MID, and those are not the taxpayers the deduction was intended to benefit.

The national and regional Realtor associations are lobbying fiercely to retain the deduction, citing concerns that its removal would send shockwaves through an already shaky housing market. Here in Massachusetts the argument is that the deduction at least in part helps offset the obscene prices people pay for homes. The Bay State is the seventh largest benefactor of the MID, so there may be some truth to that statement.

The tax code is burdensome, cumbersome and unwieldy; reform is not only an admirable goal, it will someday become an economic necessity. Better to get in front of that now, lest the nation end up like Massachusetts, unable to cope with reformation until it becomes a catastrophe.

As unwieldy as the tax code is, reformation will be a long and arduous process. Given its performance this year, there is no indication that Congress is up to the task, but since they seem hellbent on trying: capping the MID should be on the table. Killing it should not.

MID On The Chopping Block

by Banker & Tradesman time to read: 2 min