In a paper published on January 6, 2014, authors Benjamin N. Harris, C. Eugene Steuerle, and Amanda Eng analyze current tax provisions that support home ownership and find them lacking. In the paper, titled “New Perspectives on Homeownership Tax Incentives,” the authors offer three ways that the tax code could better subsidize home ownership if that is the objective of public policy.
They conclude that the existing tax subsidies that allow deductions for mortgage interest and real property taxes “do little to encourage homeownership. Instead they induce people to take on more debt to buy bigger houses or move to jurisdictions that provide more services.” They also subsidize ongoing costs of owning a house, instead of the costs of buying or selling a home, which constitute one of the largest home ownership expenses. The paper also cites the expensive and regressive nature of the current tax code
The authors do a good job of explaining the exclusion of “imputed rent” from taxation, which some analysts consider to be the biggest federal subsidy of homeownership. Imputed rent is the market rental value of an owner-occupied house and essentially is non-taxed income to the homeowner.
They offer five principles for reform:
- Subsidize accumulation of home equity, not factors like mortgage debt. Given the current incentive of mortgage interest deduction to borrow more, it actually is a disincentive for wealth accumulation, one of the purported benefits of home ownership.
- Subsidize purchases of primary homes only, not second homes or home equity loans,
- Focus subsidies on households who are deciding between renting and buying.
- Do not disproportionately benefit taxpayers with higher incomes and tax rates
- Take into account the high transaction costs of home buying and selling in designing homeownership subsidies.
The three reform proposals offered by the authors are based on these principles. The first reform is a first time home buyer refundable tax credit. The second is a refundable tax credit for real property taxes up to a maximum benefit. The third proposal is a fixed homeowner tax credit that will phase out as income increases. The authors acknowledge that none of the three are perfect and note their shortcomings.
The authors consider proposals to convert the mortgage interest deduction to a tax credit based on mortgage interest, such as the United for Homes proposal, to be a variation on the flawed notion of subsidizing debt over equity.
None of the reform proposals are analyzed for their potential to raise revenue to pay for other priorities, such as the National Housing Trust Fund.
To read the paper, go to: http://bit.ly/1m2SjkR