Regional Differences in the Utilization of the Mortgage Interest Deduction

The value of federal income-tax deductions, such as the home mortgage interest deduction (MID), varies across geographic regions. Taxpayers in regions with relatively high incomes, state and local income taxes, and housing costs are more likely to utilize deductions; that is, they are more likely to itemize, more likely to have a larger deduction conditional on itemizing, and more likely to get a larger tax benefit from their deductions. To the extent utilization of the MID varies across regions, any income-tax change that alters the MID may have effects that vary spatially. This paper uses 1995 tax data to investigate the extent to which the current mortgage deduction is utilized, and how the utilization differs across regions. We show that there are substantial regional differences in utilization of the MID. For example, only 21 percent of taxpayers itemize in the West South Central division, while 38 percent itemize in the New England and Middle Atlantic divisions. Conditional on claiming a MID, the average size of the MID ranges from $5,700 in the West North Central division to $10,000 in the Pacific division, and the average tax savings associated with the MID range from $1,100 in the East South Central division to $2,100 in the Pacific division. Differences in utilization are related to differences in income, the level of house prices, the rate and form of state and local taxation, and demographic differences that affect homeownership and the amount of mortgage debt. About 40 percent of the explained regional variation in itemization is due to regional differences in house prices, and another 20 percent is due to differences in state and local income and property taxes. About two-thirds of the explained regional variation in the average size of the MID is due to regional differences in housing prices and state and local income and property taxes.