	Introduction

This report presents data on the geographic distribution of the mortgage interest deduction (MID) tax expenditure. Tax expenditures can generally be viewed as either government spending administered via the tax code, or tax incentives that are intended to achieve particular policy objectives. Regardless of the interpretation, tax expenditures such as the mortgage interest deduction provide a benefit to qualifying taxpayers by lowering their federal tax liabilities. Additionally, understanding how the benefits of the deduction are currently distributed across taxpayers in different states may help Congress in assessing the potential impact on constituents from a particular policy change. Background

Currently, a homeowner may deduct the interest paid on a mortgage that finances a primary or secondary residence as long as they itemize their tax deductions. The amount of interest that may be deducted is limited to the interest incurred on the first $1 million of combined mortgage debt and the first $100,000 of home equity debt ($1.1 million total). If a taxpayer has a mortgage exceeding $1 million they may still claim the deduction, but they must allocate their interest payments appropriately to ensure that only the interest associated with the first $1 million of debt is deducted. 99-514 ) eventually restricted the amount of mortgage interest that could be deducted and limited the number of homes for which the deduction could be claimed to two. In recent years a number of proposals to modify the mortgage interest deduction have emerged. Some proposals would reduce the maximum mortgage amount on which the mortgage interest deduction could be taken, presumably to better target potential new homeowners and moderate income taxpayers. Other proposals have suggested converting the deduction to a tax credit. A credit would provide the same dollar for dollar benefit to claimants regardless of income, and would not require itemization. Still other proposals would preserve the provision as a deduction, but limit the rate at which higher income taxpayers could deduct interest. Data Analysis

The Joint Committee on Taxation (JCT) has estimated that the mortgage interest deduction reduced federal tax revenues by $59.0 billion in FY2016. These factors are discussed in greater detail below. Home Prices

Area home prices contribute to the variation in the mortgage interest deduction data in two primary ways. Thus a portion of the geographic variation in the data presented in this report is attributable to variation in state and local taxes. It is important to note that any change to the mortgage interest deduction would likely require careful consideration of how to transition to the new policy so as to minimize disruptions to the housing market and overall economy. The variation in the claims rates and benefit value documented in this report suggests that eliminating the deduction could help promote a more uniform tax treatment across taxpayers. The methodology for producing the state-by-state distributional estimates (described below) required use of the JCT's estimate of the mortgage interest deduction tax expenditure by income.
This report analyzes variation in the mortgage interest deduction tax expenditure across states. Tax expenditures, such as the mortgage interest deduction, can generally be viewed as government spending administered via the tax code, or as tax incentives that are intended to achieve particular policy objectives. Regardless of the interpretation, tax expenditures provide a benefit to qualifying taxpayers by lowering their federal tax liabilities. Recent proposals to change the mortgage interest deduction could affect how its benefits are distributed. Understanding how the deduction's benefits are currently distributed across taxpayers in different states may help Congress in assessing the potential impact on constituents from a particular policy change.
Currently, homeowners may deduct the interest they pay on mortgages that finance a primary or secondary residence as long as they itemize their tax deductions. The amount of interest that may be deducted is limited to the interest incurred on the first $1 million of combined mortgage debt and the first $100,000 of home equity debt ($1.1 million total). If a taxpayer has a mortgage exceeding $1 million they may still claim the deduction, but they must allocate their interest payments appropriately to ensure that only the interest associated with the first $1 million of debt is deducted. The Joint Committee on Taxation (JCT) has consistently estimated the mortgage interest deduction to be one of the largest tax expenditures.
The results of the analysis presented in this report indicate that the benefits of the mortgage interest deduction are not distributed uniformly across the states. A number of reasons that likely explain why the variation exists are discussed, including differences in homeownership rates, home prices, state and local tax policies, and area incomes. The data used in this report, however, are not detailed enough to isolate and quantify the effect each one of these factors has on the variation across states.
In recent years a number of proposals to modify the mortgage interest deduction have emerged. Some proposals would reduce the maximum mortgage amount on which the mortgage interest deduction could be taken, presumably to better target potential new homeowners and moderate-income taxpayers. Other proposals have suggested converting the deduction to a tax credit. A credit would provide the same dollar-for-dollar benefit to claimants regardless of income, and would not require itemization. Still other proposals would preserve the provision as a deduction, but limit the rate at which higher-income taxpayers could deduct interest.
Analysis of several of the more frequently proposed changes suggests that some of them may provide a benefit that is more uniformly distributed. For example, limiting the size of mortgages that qualify for the deduction could reduce some of the variation that is caused by regional differences in home prices. Replacing the deduction with a credit, or limiting the rate at which interest could be deducted, could reduce variation in benefits caused by differences in area incomes. Still, it is important to understand that any change to the mortgage interest deduction would likely require careful consideration over how to transition to the new policy to minimize disruptions to the housing market and overall economy.