Eliminate the Home Mortgage Interest Deduction

The home mortgage interest deduction is an itemized deduction that allows taxpayers to deduct mortgage interest on up to $750,000 in principal. The One Big Beautiful Bill Act made the temporary $750,000 cap permanent instead of allowing the cap to rise back to $1 million at the end of 2025.

This option eliminates the itemized deduction for mortgage interest. Compared to other tax changes, limiting itemized deductions for housing-related expenses has a particularly harmful effect on economic output because it affects multiple margins of economic activity. First, it raises the cost of capital for investment in owner-occupied housing, thus reducing investment in that category. Second, it also raises marginal tax rates on tax filers, reducing returns to work and investment. Third, it would also reduce the use of itemized deductions, which indirectly raises the tax burden on housing investment, as fewer filers take the itemized deduction for state and local taxes (SALT) paid. Notably, the effects of this option are smaller after 2029, when the SALT deduction limit returns to $10,000, which reduces the number of taxpayers who benefit from the mortgage interest deduction.

On a conventional basis, this option would decrease the primary deficit by $367.9 billion over the budget window. Long-run GDP would fall by 0.4 percent and long-run GNP by 0.2 percent. On a dynamic basis, the primary deficit would increase by $12.9 billion from 2027 through 2036, meaning the losses in other tax revenues from the reduction in work and investment dominate the revenue raised by eliminating the itemized deduction. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 177.4 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.1 percent, a smaller effect than earlier in the budget window when more taxpayers are expected to itemize. On a long-run dynamic basis, taxpayers would see a 0.4 percent decrease on average.