Closing MN's Budget Deficit

State Tax Deductions for Housing: Endangered Species?

Is now a good time to make upper bracket housing in Minnesota (or anywhere else) more expensive?

The Minnesota state legislature -- or at least the House -- seems to thinks so.

On Saturday, it passed a bill that would make mortgage interest and property taxes non-deductible in calculating state income taxes (the bill would also raise taxes on those making more than $250k). The moves are the corner piece of the legislature's efforts to close an estimated $4.2 billion deficit.

Leaving aside the public policy merits of the bill, consider its effect.

If you want to make something more expensive, tax it -- or in the case of housing, remove a long-standing subsidy.

The problem with the House's bill is that upper bracket housing is already under siege, from multiple quarters.

The gap between "conforming" loans -- up to $417k-- and jumbo loans is at record levels. The former carry an interest rate around 4.75%; the latter, well over 6%. The reason is that only conforming loans can be readily packaged and sold to investors via Fannie Mae, Freddie Mac, etc.

"(Un)settled Expectations"

Of course, the recession is already pressuring prospective Buyers of upper bracket housing.

Companies trying to pare their labor costs can save a lot more axing senior executives than more modestly paid subordinates.

Meanwhile, anyone who can afford an expensive home has likely seen their investments -- and their wherewithal to come up with a healthy, six figure downpayment -- whacked by as much as 50% the last two years. That's at the same time that the middle-bracket home they currently own has dropped an average of 25%, metro-wide.

Further raising the cost of owning a more expensive home is not exactly going to stimulate demand.

Even if subsidizing expensive housing isn't something that we, as a society, want to continue to do, the fact is that thousands of area homeowners made their purchase decisions relying on the rules as they understood them to be at the time. Lawyers and policy-types refer to this phenomenon as "settled expectations."

For now, the debate is likely moot: the Minnesota Senate hasn't taken action on a companion bill, and Governor Pawlenty has signaled that he will veto anything that the entire legislature approves.

However, you could say that the issue is now on the table.