RealEstateEconomyWatch.com

Taxpayers in states along the East and West Coasts are grabbing the lion’s share of tax savings from the mortgage interest deduction, the third largest tax expenditure that saved taxpayers filers deducted about $72 billion in 2011.

The benefits of the mortgage interest deduction skews heavily toward certain states, particularly along parts of the East and West Coasts. The percentage of tax filers deducting mortgage interest ranges from nearly 37 percent in Maryland to 15 percent in West Virginia and North Dakota. The average mortgage interest deduction for all tax filers (not just those taking the deduction) varied from a high of $4,580 per tax filer in Maryland to a low of $1,192 per filer in North Dakota, according to a new report released yesterday by The Pew Charitable Trusts. The national average was $2,713.

The variation across metropolitan areas within states is even greater, with tax filers in larger areas generally claiming the deduction at much higher rates and greater average amounts than filers in medium- and small-size areas. In Texas, for example, the state’s highest claim rate-in the Austin area-is 4 times larger than the lowest rate, in the Odessa area.

With the housing recovery and higher home values, the mortgage interest deduction is expected to grow and become more of a target for tax reformers in Washington. Before the onset of the housing crisis in 2007 the total mortgage interest deducted by tax filers peaked at $543 billion in deductions and roughly $85 billion in forgone revenue. Between 2007 and 2010, the total amount deducted fell 28 percent, and the number of claims declined by 12 percent.

The decrease in mortgage interest deduction claims lines up with the housing crisis and recession, but these events affected states to varying degrees. Declines appear to have been most severe in the West and in the corridor stretching from the Southeast to the Great Lakes region, and less severe in the middle of the country west of the Great Lakes area.

“Policymakers are actively discussing whether to modify tax expenditures, such as the mortgage-interest deduction, as they consider federal deficit reduction and tax reform,” said Pew’s Anne Stauffer, an expert on federal and state fiscal policy. “Looking at who benefits by state should inform federal policymakers as they consider options for changing or eliminating tax expenditures over the next several years.”

The mortgage interest deduction generally allows tax filers who own a home and itemize their deductions to subtract interest paid on mortgage debt from their gross income. In 2011, tax filers deducted nearly $360 billion in mortgage interest, resulting in roughly $72 billion in foregone federal income tax revenue.

The geographic concentration in areas where property values and incomes tend to be higher is not surprising given the current structure of the mortgage interest deduction. However, there are other factors that could also influence the distribution, such as differences in housing turnover frequency and the proportion of tax filers living in rental housing.

Similar to the variation across states, tax filers within states claim the deduction at different rates and amounts depending on where they reside. In 2007 (the latest available data for intra-state analysis), tax filers in and around larger metropolitan areas generally claimed the mortgage interest deduction at much higher rates and at higher amounts than those in less populous areas.