The Pew’s Tax Expenditure Database on Housing Subsidies.

In his book The Hidden Welfare State (1999), Christopher Howard wrote:

If one had to name a Holy Trinity of U.S. social programs in the late twentieth century, it would consist of Social Security, Medicare, and the home mortgage interest deduction.  All three programs are budgetary entitlements, protected from the annual appropriations process…

Of the three programs, the home mortgage interest deduction has arguably the strongest base of political support.  It has existed longer than Social Security or Medicare, thus appearing even more firmly a part of the “natural” political landscape.  Like Medicare (and unlike Social Security), it can depend on third-party providers for support.  Home builders, building material suppliers, developers, realtors, lenders, and construction unions consider the program essential to their livelihoods…how a small wrinkle in the original tax code became, many decades later, a huge and sacrosanct social program…is that the structure of tax expenditures as a policy tool makes growth without advocacy possible.  As more people pay income taxes and marginal tax rates increase, the value of not paying taxes goes up.

And since 1999, the total amount of housing subsidized through tax expenditures has gone up quite a bit.

It’s a bit mind-boggling when you actually realize how much money goes through this mechanism. The new Subsidyscope Tax Expenditure Database by Pew is worth your time, particularly their dissection of the subsidies we give towards housing. They created a database estimates by the Department of Treasury and the Joint Committee on Taxation. Since they differ, for the following graphs I take the average of the two different sources by year adjusting for inflation (note to Pew, have data in real and nominal dollars if possible). Here’s Ezra Klein with more.

First, when it comes to housing there are major, major costs involved with the way we subsidize housing through Tax Expenditures:

That’s almost $200 billion dollars a year. There are many ways we use tax expenditures to subsidize housing, but rather than graph them all I want to point out that there are three main mechanisms that account for over 80% of the subsidy:

Here is Pew’s description for each deduction or exclusion:

Deductibility of mortgage interest on owner-occupied homes

The baseline tax system would allow the write-off of expenses incurred in earning income. It would not allow the deductibility of expenses when income or the return on investments are not taxed. In contrast, the Tax Code provides that owner-occupants of homes may deduct mortgage interest on their primary and secondary residences as itemized nonbusiness deductions even though the value of owneroccupied housing services is not included in a taxpayers taxable income. In general, the mortgage interest deduction is limited to interest on debt no greater than the owners basis in the residence, and is also limited to interest on debt of no more than $1 million. Interest on up to $100,000 of other debt secured by a lien on a principal or second residence is also deductible, irrespective of the purpose of borrowing, provided the debt does not exceed the fair market value of the residence.

Deductibility of State and local property tax on owner-occupied homes

The Tax Code allows owner-occupants of homes to deduct property taxes on their primary and secondary residences even though they are not required to report the value of owner-occupied housing services as gross income.

Capital gains exclusion on home sales

The baseline tax system would not allow deductions and exemptions to certain types of income. In contrast, under current law, a homeowner can exclude from tax up to $500,000 ($250,000 for singles) of the capital gains from the sale of a principal residence. The exclusion may not be used more than once every two years.

And that’s just a total amount, that isn’t the cross-section of who gets the subsidy.  You can see how regressive the current system is when you look at this graph from the Urban-Brookings Tax Policy Center document, How to Better Encourage Homeownership (2005), which includes multiple ways we subsidize housing:

People who make 50K a year make just enough from this subsidy to defend it to the death, even though this subsidy mostly goes to those making over 500K a year.  From an elite’s point of view, you couldn’t design it any better.

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5 Responses to The Pew’s Tax Expenditure Database on Housing Subsidies.

  1. Pingback: Links 1/8/11 « naked capitalism

  2. This is all true and clear. Yet another bit of welfare for upper-income americans. Yet I think the problem is part of a bigger one. This is one of the many sacred cows out there that the average Joe defends to the death when anybody talks of doing something about the deficit. Yet clearly he would be better off if it was changed. But this sort of rational discussion does no good. The mortgage interest deduction remains.
    Can anybody figure out a way to make this point that actually works? That actually convinces Joe 6 pack?

  3. lorac says:

    If you figure out a way to convince Joe 6 pack, let me know! I work in a field that has big detractors, and the arguments are mostly emotional, not rational. Rational, logical points do not win the day, IMHO. Yet, because I am analytical (mostly rational I hope) individual, it is difficult for me to argue back emotionally. I think that we need to incorporate more of the emotional language to make any gains. As for myself, I vacillate between trying and giving up because it hurts when I hit my head against the wall so much.

  4. Jack E. Lope says:

    Individuals used to be able to deduct consumer interest charges from their income, too.

    Now, only businesses can deduct interest charges for any borrowing they do, and individuals are limited to home-mortgage interest.

    If we eliminate the home-mortgage deduction, many (most?) “second homes” would still qualify to have mortgage interest deducted. So, it’s still welfare for the upper-income Americans….

  5. Pingback: What Do LV Democrats Want in a Dent Challenger?

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