A recent audit of the Oregon Mortgage Interest Deduction labels the tax policy as regressive and inequitable, and paints it as expensive and ill-conceived.
The Mortgage Interest Deduction
Oregon allows taxpayers to deduct mortgage interest from their state taxes through a deduction known as the Mortgage Interest Deduction (MID). The state MID mirrors the federal deduction, since Oregon uses the federal government’s definition of taxable income. The Tax Cuts and Jobs Act (TCJA) increased the Mortgage Interest Deduction from $750,000 to $1 Million. Taxpayers can claim the MID on their primary residence, as well as on secondary residences. The definition of a residence is rather loose, per the policy, and includes houses, condominiums, and houseboats. The $1 Million (previously $750,000) limit applies to the total amount deducted, not to each residence.
The (alleged) inequity
The audit calls out Oregon’s use of a MID as regressive and inequitable because of the way it skews towards higher income earners, Oregonians living in urban areas, and white taxpayers. Per the results of the audit, the five counties with the highest MID benefit are, Clackamas, Washington, Deschutes, Columbia, and Multnomah. All five of those counties are classified as “urban.” Coos County ranks 24th, with just under $150 average benefit per taxpayer (compared to Clackamas County, where the average is about $330 per taxpayer).
Why the imbalance?
The MID is not inherently “regressive and inequitable.” The MID does, however, benefit wealthier taxpayers more than poorer ones. For one thing, in order to take the Mortgage Interest Deduction, a taxpayer must itemize his or her deductions. Itemizing deductions only makes sense if the sum of the items exceeds the standard deduction ($12,950 for a single taxpayer in tax year 2022). Since higher-earning taxpayers are more likely to have more deductions to itemize, they are also more likely to take advantage of the MID.
Also, higher-earning Oregonians purchase, on average, more expensive homes. A more expensive home means more mortgage interest to deduct. And, of course, the median home values in urban areas are typically higher than rural areas. Clackamas County homes, for example, currently have a median sale price of $590,000, while Coos County homes have a median sale price of $325,000.
The audit’s recommendation
The audit doesn’t make a policy recommendation explicitly. Rather it recognizes that the Oregon Department of Revenue’s role is that of a tax administration agency, not an agency that’s responsible for setting state legislative priorities. The audit does state that “Barring Legislative action, the MID, as currently designed, will continue to produce inequitable results.” The recommendations given in the audit are:
- Identify a clear purpose for the MID in statute and determine if changes to the design of the MID are necessary to ensure that the identified purpose is met
- Identify a state agency that will be responsible for regularly evaluating the MID to ensure it meets its legislatively identified purpose.
