Red State, Blue State, and the mortgage interest deduction

Perhaps nothing reinforces the social scientists’ biggest lament that findings with catchy, reductive labels take hold far more than detailed, contextualized, and nuanced findings like the Red State, Blue State thing. It doesn’t hold up to much scrutiny. But it gets used, and this morning I was reading an interesting note on it.

Via Tax Prof blog this morning comes a story on a short analysis from Martin Sullivan on the geographic distribution of the benefits of the mortgage interest deducation, arguing that California and Maryland homeowners get more from the deduction than do people in West Virginia and other rural states. The story appears in Tax Notes.

The comments are, as usual over there, pretty sharp. I’m not sure why this report is a surprise to anybody: these are average benefits, and California has far more multi-million dollar homes than West Virginia does, pushing the distribution of benefits up, and the more interest you pay, the more valuable the deduction is for you, and the higher your bracket, the more valuable it is. The deduction has always had a free food for millionaires quality towards it, and regional housing markets differ markedly. No, it’s not fair that the mortgage interest deduction benefits blue states more than red states, but professors in Iowa City live like real estate kings while I get rent an apartment—or pay four times what they do—for housing.

It would be interesting to break this down with a more structural look: I’m not sure anybody has done so, but theory would suggest that banks, homebuilders, and landowners would receive at least a part of the benefit, as part of the distortion would be increasing the relative attractiveness of mortgages and homes over other goods.

One of the other interesting breaks in the theories here for sustainable development concern the assumption that many urbanists make that if you eliminated the deduction, people would rent more and live in apartments more. I’m sure some of that would occur, but both higher benefits from the mortgage interest deduction and more apartment dwelling are driven by regional housing markets–a lot of people wanting to live in the same place drives up land values, which drives up housing values and increases the returns to density.

At the margin, perhaps–those in small houses go back to renting in apartments, those in higher levels of the market buy smaller than they otherwise would. But I also suspect that smaller regions get a boost from when housing costs more in major metro areas; no, many people do not have discretion in where they live, but many others do–with some predictable effects about mobile, young worker boosting regional economies like Austin, TX and Charlotte, NC. Sorting doesn’t just occur within regions, iow, it happens among regions, and where you can buy may be important to some demographics.