USC Price School of Public Policy

Green Senate Finance Testimony

Green Testifies at Senate Finance Hearing on Homeownership

By Matthew Kredell

Green testifies at Senate Finance Committee hearing Professor Richard Green, center, testifies in Washington, D.C., on tax reform options and incentives for homeownership.
Photo by David Scavone

USC School of Policy, Planning, and Development (SPPD) professor Richard Green testified on tax reform options and incentives for homeownership in front of the U.S. Senate Committee on Finance.

Green, director and chair of the Lusk Center for Real Estate, which is housed jointly within SPPD and the USC Marshall School of Business, focused his testimony during the Oct. 6 hearing on phasing out the home mortgage interest deduction. Sen. Max Baucus (D-Mont.), chairman of the committee, asked Green to participate.

“It’s exciting,” Green said. “When you work on policy issues the way I do, you hope that what you’re doing is at least marginally relevant, and this is verification of that.”

The home mortgage interest deduction, a residual of the 1913 tax code, allows taxpayers to reduce their taxable income by the amount of interest paid on home mortgage loans.

Richard Green Photo by David Scavone

In his oral and written statement, Green asserted that the deduction does not encourage homeownership and that those on the margin of owning a home get little-to-no benefit. The value of the subsidy to someone in the 35 percent tax bracket is more than twice the size of someone in the 15 percent bracket.

All other tax deductions on loan interest rates were eliminated by the Tax Reform Act of 1986. The home mortgage interest deduction was among those to be eliminated in the original bill, but lobbying from housing industry groups helped get it reinstated prior to the law’s passage.

Green testified that phasing out the mortgage interest deduction would encourage households to pay down their mortgages more quickly, relying less on leverage and leading to greater market stability.

He warned that the deduction should not be eliminated overnight, as the housing market remains fragile. Instead, he suggested that the deduction be phased out over 10 years by reducing the mortgage cap by $100,000 a year from the current $1 million limit. He said the process should not begin until the Federal Housing Finance Agency’s house price index shows year-over-year growth equal to the rate of the consumer price index.

“Professor Green’s activities demonstrate the role USC researchers can play in influencing national policies,” said Jennifer Grodsky, executive director of the USC Office of Federal Relations in Washington, D.C. “It was clear his testimony resonated with the senators he addressed, and their questions indicated a real interest in how his research could help them shape housing policy.”

Green, who was one of five experts in the field to testify at the hearing, doesn’t anticipate that Congress will act fully on his suggestions but does think housing tax reform could happen.

“I think there’s a chance that mortgage-interest deduction will be scaled back, reduced from a million to half a million and maybe converted to credit,” Green said. “This would mean that the value is no higher to the higher-income people than to lower income. I don’t expect it to go away completely. That would stun me.”

If Congress does wish to encourage homeownership through tax policy, Green offered that a refundable credit of 15 percent would be more effective.

“If I had my druthers, I’d just do away with all of it,” Green said. “But the credit at least does what the mortgage interest deduction is advertised to do – encourage people to become homeowners who otherwise might not.”

Last month, Green testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs about the future of government enterprises Fannie Mae and Freddie Mac.