California Tax Expenditures Disproportionately Benefit Higher Income Homeowners

A study by the California Budget & Policy Center titled Spending through California’s Tax Code finds that the state’s tax expenditures disproportionately benefit higher income homeowners. The tax benefit from the mortgage interest deduction on state tax returns is 36 times greater than the benefit from the state’s tax credit for renters. The mortgage interest deduction is 19 times greater than the combined tax benefits of the state’s renters’ credit, student loan interest deduction, and child and dependent care credit.

California’s mortgage interest deduction from taxable income is the state’s largest tax expenditure. Of the $3.8 billion tax benefit provided by the deduction, more than 74% goes to households with incomes over $100,000. Targeted tax expenditures for households with lower incomes are relatively small. The student loan interest deduction provided tax benefits of $54.8 million to California taxpayers in 2012, 72% of which went to households with incomes between $20,000 and $100,000; the state’s child and dependent care credit provided benefits of $34.3 million, 89% of which went to households with income between $50,000 and $100,000; and a renters’ tax credit provided $105.8 million of benefits to renters below a particular income.

The degree to which tax benefits received by higher income homeowners outstrip the tax benefits received by lower income households results in a markedly regressive state income tax. California’s lowest-income families spend an average of 10.5% of their income on state and local taxes. Families in the top of 1% of income spend 8.7%. The study recommends that California set expiration dates and require periodic reviews for tax expenditures because they rarely come up for public debate. The report also recommends targeting the benefits of the state’s tax expenditures to low and middle-income households.

NLIHC’s United for Homes campaign proposes mortgage interest deduction reform at the federal level. United for Homes proposes converting the mortgage interest deduction to a tax credit that would assist lower income homeowners and lowering the portion of a mortgage eligible for a tax benefit from $1 million to $500,000. The reform would save more than $200 billion over 10 years that could be invested to meet the housing needs of the lowest income households.

Spending through California’s Tax Code is available at: