The author, Benjamin Harris, considers four changes to the tax code: the President’s proposal to cap the value of all itemized deductions at 28%; eliminate both the mortgage interest (MID) and property tax deductions; limiting the MID to 20% and adding a flat tax credit on closing costs; and raising tax rates on more affluent families as happened in the American Taxpayer Relief Act (ATRA) of 2012 and will happen when the Affordable Care Act is fully implemented.
Harris concludes that:
“while it is critical to account for unintended effects of various reforms, the analysis performed in this study suggests that most plausible tax reforms are, at best, likely to have only a modest effect on the cost of housing investment and subsequent housing prices. These findings suggest that housing prices are not necessarily a casualty of a more efficient tax code, and may even benefit from thoughtful tax reform.”
The findings would seem to refute claims by some opponents of MID reform that changes to the MID would cause a decline in housing values.
In addition to mortgage interest and property taxes, and the opportunity costs of not investing housing equity elsewhere, the study includes transaction costs, which are usually not considered. Transaction costs are those incurred at the purchase and sale of a house; the longer a house is owed, the lower the transaction costs are as a share of all costs.