One of the documents posted with the Administration’s FY16 proposed budget is a table estimating the cost of federal tax expenditures. Tax expenditures are tax breaks for corporations and individuals that have been enacted into law to subsidize a particular activity. For all intents and purposes, they are spending by another name. The Office of Management and Budget (OMB) is required to calculate the expected cost of tax expenditures each year. The 169 tax expenditures reported by OMB for 2016 amount to $1.31 trillion in uncollected federal taxes.
Housing is heavily subsidized by tax expenditures, especially by the mortgage interest deduction (MID). In the President’s FY16 budget proposal, OMB projects the MID to cost $75.26 billion in 2016 and $102 billion by 2019. The tax code also allows for the deduction of state and local property taxes, projected to cost $35.5 billion in 2016, and the exclusion of capital gains on home sales, projected to cost $39.5 billion in 2016. OMB also includes a tax expenditure called exclusion of “net imputed rental income.” Imputed rent accrues to homeowners because they do not pay taxes on the income they derive from not paying rent, even though they get to take tax breaks for the costs of owning a home, i.e. mortgage interest and property taxes. OMB projects the cost of the imputed rent exclusion to be $82.4 billion in 2016. Thus, the total cost of tax expenditures that subsidize homeowners in 2016 is projected to be $233 billion, 18% of the cost of all tax expenditures. The projected cost of Low Income Housing Tax Credit (LIHTC) in 2016 is $7.9 billion.
The Joint Committee on Taxation (JCT) of the Congress also prepares a regular report on federal tax expenditures, but uses a different methodology. In its August 2014 report, JCT estimated the cost of the MID to be $81.6 billion in 2016. JCT also reports on the distribution of several tax expenditures, including the MID, by income. JCT reports that 166 million tax returns were filed in 2014, 29% of which were itemized. In order to benefit from the MID, a taxpayer must file an itemized tax return. Just 21% of all tax returns claimed the MID. The top 61% of taxpayers who claimed the MID (those with incomes of $100,000 or more) received 82% of the total benefit. The top 18% of taxpayers (incomes of $200,000 or more) received 42% of the benefit.
The United for Homes campaign is calling for reforms to the MID to benefit more low and moderate income homeowners and raise new revenue to provide funding for the NHTF. To learn more about the proposal, go to www.unitedforhomes.com.
To see OMB’s projected cost of tax expenditures, go to: http://www.whitehouse.gov/omb/budget/Analytical_Perspectives (see Supplemental Materials, Tables 14-1 to 14-4)
To read JCT’s August 2014 report on tax expenditures, go to: https://www.jct.gov/publications.html?func=startdown&id=4663. The JCT report offers a good explanation of the two methodologies used by OMB and JCT.