There’s a study out (hat tip: Instapundit ) on who benefits most from the mortgage interest deduction. The answer, in a nutshell, high-income in high-nominal-income states. Or, to put it another way, Democrats. Reason: High-income people with large mortgages tend to be concentrated in metropolitan areas like New York, Los Angeles and San Francisco which have the highest house prices—and where affluent people tend to vote Democratic. So the mortgage interest deduction shields a lot more dollars of income from taxation for these people than it does for people with ordinary incomes—or even affluent people in metro areas like Atlanta, Dallas-Fort Worth and Houston, where house prices are significantly lower because of greater availability of land and fewer no-growth environmental restrictions. From the study: "the per capita benefit from the mortgage interest deduction for Californians is more than two and a half times that for Texans."
The political upshot is that this makes the mortgage interest deduction more vulnerable to being scrapped or limited in a tax reform measure that cuts rates and eliminates preferences. Democrats can argue that it gives away too much to high-income people and Republicans can argue that it’s tilted to give the most benefits to high-income Democrats. Both are pretty strong arguments. It’s long been assumed that the mortgage interest deduction is politically untouchable; but maybe not.
Ancillary economic question: What would be the effect of eliminating the mortgage interest deduction? It might incentivize many people to just pay off the mortgage. Getting rid of the interest cost would be like buying an income stream of whatever the interest rate is. This could significantly reduce mortgage debt in the nation. I’m sure others have thought more about this than I have, but these are interesting questions.