We analyze how changes in the income tax deduction for mortgage interest would affect loan-to-value ratios on owner-occupied homes, the distribution of income tax liabilities, and the consumption of housing services. Using the 2004 Survey of Consumer Finances, we estimate that repealing the mortgage interest deduction in 2003 would have raised federal and state income tax revenues by $72.4 billion in the absence of any household portfolio adjustments, but by only $58.5 billion if homeowners drew down financial assets to pay down their mortgage debt.
Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing with James Poterba, National Tax Journal vol. 64, number 2 (June 2011), 531-564 (PDF)