An article published in the spring 2014 issue of National Affairs reports on a study by economists associated with the R Street Institute on the effectiveness and efficiency of homeownership tax subsidies. Entitled “Rethinking Tax Benefits for Home Owners,” the article’s authors examine the federal income tax treatment of homeownership (mortgage interest deduction, property tax deduction, and exclusion on capital gains) along several dimensions using zip-code level IRS data. They conclude that the homeowner tax subsidies are “highly regressive, extremely expensive, and of little obvious value to society at large.”
The authors note that the American public views the mortgage interest deduction (MID) very positively, but if people understood who benefits and who does not, they would be less enamored with it. First, the MID favors higher income homeowners far more than it does low and moderate income homeowners. While 90% of taxpayers have adjusted gross incomes of $100,000 or less, they receive only 25% of the MID benefit.
Further, the MID benefit is concentrated in the suburbs of large cities in the Northeast, Mid-Atlantic, and West Coast. Even in these areas, moderate income homeowners in inner cities and inner ring suburbs receive much less benefit from the MID than people with larger homes and larger incomes in neighboring suburbs.
Contrary to popular perception, the MID does not correlate with higher homeownership rates. Most of the MID benefit goes to people who would be homebuyers anyway. The MID does not incentivize people to choose buying over renting.
However, the MID does correlate with the purchase of larger homes. “Estimates show that the generosity of this deduction alone increases the average size of homes by between 11% and 18%.” Besides encouraging people to buy larger, more expensive homes, the MID incentives people to take on more debt rather than save.
The arguments in this article are similar to those made by NLIHC and others about the need to reform the MID. The authors suggest that a tax credit on mortgage interest would do more to support low and moderate income homeowners than current policy. NLIHC has proposed lowering the cap on the size of mortgages for which interest can be deducted from $1 million to $500,000 and converting the MID to a 15% non-refundable tax credit. The number of homeowners who would get a tax break under this proposal would grow from 39 to 55 million. Virtually all (99%) of new beneficiaries would have incomes under $100,000.
NLIHC proposes that the revenue raised by this change ($200 billion over ten years) be used to fund affordable rental housing for extremely low income households through the National Housing Trust Fund.
The article is authored by Andrew Hanson, Ike Brannon, and Zackary Hawley. It can be found at: http://bit.ly/1fez8F6
To read more about NLIHC’s proposal, go to www.unitedforhomes.org.