The mortgage interest deduction is one of the most purebred sacred cows in American tax policy. But by doubling the personal exemption and proposing to halve the mortgage eligible for the deduction to $500,000, House Republican tax proposals have opened the door to a fundamental shift in the tax treatment of housing. This is a rare opportunity to realign federal tax support for housing to help all taxpayers, renters and owners, in a consistent, progressive way without sucking badly needed support from the nation’s housing economy to pay for tax cuts for corporations and the wealthy.
The MID is America’s largest and most expensive housing policy initiative. Studies have shown that it is regressive, benefitting those with the most expensive homes and highest incomes most, and that it generally encourages greater debt and higher house prices. It does little to expand access to homeownership. Unlike the direct federal spending programs for low income rental housing assistance, the MID is an entitlement that has no income restrictions, no work requirements, no annual appropriations process and only the most modest of caps – $1.1 million in housing debt. And it doesn’t help the middle class, the Urban Institute-Brookings Institution Tax Policy Center concluded in 2015 that less than 3% of taxpayers earning below $50,000 took the deduction and only about 25% of those with incomes between $50 and $125,000 did so.
These facts have united experts across the policy spectrum in urging fundamental reform. Even still, for decade after decade, the housing industry has remained steadfast in defense of the deduction. But the new House tax plan would make itemizing deductions like the MID pointless for millions of homeowners. To its credit, the National Association of Home Builders understood the peril in opposing tax relief for middle income taxpayers through a higher standard deduction only because it erodes the already weak economic justification for the MID. They shifted their position and publicly proposed to replace the MID with a tax credit, whose details are not yet available, that would shift the tax benefits to a broader and, presumably, more justifiable part of home-owning taxpayers.
Although the House proposal did not adopt a tax credit approach and the Senate bill so far has left the MID alone, this kind of reform is long overdue. Shifting to a properly structured and targeted credit, which has been touted as far back by housing advocates like the NLIHC since the 1970s, would be a significant reform that the Joint Tax Policy Center has estimated could increase benefits significantly to those with incomes below $150,000.
But the discussion should not stop there.
While greater fairness in tax policy for homeowners is vital, it is renters that face the most significant challenges in today’s housing market. Nearly half of all renters now pay more than one-third of their income for rent, compared to 24% for owners. And for 70% of those earning less than $30,000 per year, about nine million people, more than half of their income is going to rent according to the Harvard Joint Center for Housing Studies.
Yet the federal government’s response is pitiful. Only about one in four of these cost-burdened households receive any form of rental assistance, amounting to a rigged lottery for those most in need. The estimated average of $8 billion that goes to preserving and developing affordable rental housing through the Low Income Housing Tax Credit, pales in comparison to the estimated $64 billion that will be foregone through MID in 2017.
The Terner Center for Housing Innovation at UC Berkeley has examined how tax policy could help reduce these burdens and restore equity in the tax treatment of housing costs. The Center’s 2016 publication proposed three options for a so-called “FAIR Tax Credit” for cost burdened renters. The options aren’t cheap – ranging from $41 billion to $76 billion in lost revenue providing rent relief to between 13 and 15 million renter households. But unlike the MID, these proposals would directly ease the crushing rent burdens of the lowest income renters. And the House plan’s changes would generate a significant amount of revenue to pay for such an initiative, a far better use of the savings than more tax cuts for the wealthy and corporations. The FAIR credit would shift rental assistance from the yearly grind of appropriations struggles and limited spending to the same entitlement status that owners have benefitted from for decades.
It is fundamentally unfair to base government assistance on a family’s housing tenure choice. Especially today, when shortages of affordable rental housing and modestly priced homes for sale have reached crisis proportions, it is time for rental and homeownership advocates to join together to right this imbalance.
There is a unique opportunity to take advantage of the House initiative to enlarge tax policy to benefit renters, and especially low income renters.
Tinkering only with changes to the MID that shift its benefits more effectively to buyers and owners is necessary, but not sufficient. Reallocating even a small measure of the billions spent today on the MID would bring some much needed balance to this year’s tax reform efforts and much needed relief to the country’s lowest-income renters.
