Billions for the Rich, Pennies for the Poor

Once again the top 1% score big with the mortgage interest deduction

The current debate over several Republican flat tax proposals has renewed public attention on the mortgage interest deduction (MID). An analysis of data from the Joint Tax Committee (JTC) of Congress reveals that this tax break for homeowners has become even more regressive, with an increasing proportion of the benefits going to the wealthiest Americans.

The study looks at FY 1995, when the MID cost the federal government $58.3 billion in revenue. The 1.2 percent of taxpayers with incomes over $200,000 received $12.6 billion in mortgage interest deductions – 21.6 percent of the entire amount. The 5.65 percent of taxpayers with incomes above $100,000 received 49.7 percent of the total.

Moreover, the total MID increased in the past year from $51.2 billion to $58.3 billion – a 14 percent jump. This increase is not due to a significant increase in the number of taxpayers taking advantage of the tax break. In FY 1994, 27.1 million tax returns took this deduction; a year later, 27.8 million did so.

What accounts for the $7.1 billion increase in tax breaks for mortgage interest? Taxpayers with incomes over $100,000 received $6.4 billion of that increase. The average benefit for taxpayers with incomes between $100,000-$200,000 increased from $3,511 to $3,603. The biggest winners were those with incomes over $200,000; their average benefit leapt from $8,348 to $9,763.

The proportion of all taxpayers taking the MID did not change significantly, increasing only from 20.7 percent to 21.3 percent. The study found dramatic differences between income categories. For example, 82.5 percent of taxpayers with incomes over $200,000 took the MID, with an average benefit of $9,763. In contrast, only about one-quarter (28.1 percent) of those in the $40,000-50,000 bracket took the deduction. Those who did so saved an average of $952 on their taxes. Among those in the $20,000-30,000 income category, only 6.6 percent took the deduction. Those few who did so received an average benefit of $502.

This analysis of JTC data confirms the view that the MID – which the National Housing Institute (NHI) has called a “mansion subsidy” – represents a regressive subsidy that primarily benefits a small but affluent sector of the population.

Each year, American taxpayers subsidize wealthy Americans to buy expensive homes. Meanwhile, housing subsidies for the poor – allocated through the Department of Housing and Urban Development – are now under attack. Yet the current $26 billion HUD budget is less than half the size of the total MID; the $29 billion in MID subsidies for those with incomes over $100,000 surpasses the entire HUD budget.

NHI’s analysis of these data over the past several years has led it to recommend replacing the current deduction with a progressive homeowner tax credit that would increase homeownership, catalyze homebuilding, generate jobs, and help stimulate economic recovery.

The tax credit would be available to all families – including those moderate-income households that do not itemize their deductions and so cannot take advantage of the current deduction. Capping the credit (at, say, $250,000 mortgages) and tying it progressively to income would limit subsidies for the wealthy but preserve them for the middle class. It would also add a large number of families who currently do not benefit. The credit could be adjusted for regional housing costs in order to avoid penalizing homebuyers and homeowners in high-cost areas like California. Thus, a tax credit would be much more efficient and fair than the current approach.

A tax credit would be a more effective way to encourage homeownership. Wealthy people would buy homes with or without a tax break. Because housing demand is more elastic among low-and middle-income consumers, a homeowner tax credit could make the difference between renting and owning for millions of working families now shut out of the American dream.

Moreover, by increasing the effective demand for homes, a homeowner tax credit would help the homebuilding industry (as well as brokers and mortgage lenders) create jobs in the construction industry, have significant ripple effects throughout the economy, and add to local tax bases.

Everyone supports the American dream of homeownership – a fundamental part of this nation’s promise of prosperity. No one wants to eliminate existing homeowner subsidies for middle class families. But the current system – which subsidizes huge homes for the rich without helping hardworking families buy even a small bungalow – is in desperate need of reform.

Income
(Thousands)
Number of Returns
(Thousands)
Number of Returns Taking Mortgage Interest Deduction
(Thousands)
% of All Returns in Income Category % of all Returns Value of Mortgage Interest Deductions
(Millions)
% of Value of All Mortgage Interest Deductions Average Value per Return for those taking Mortgage Interest Deduction
Under $10 22,750 29 17.36 * *
$10-20 25,752 420 1.60 19.65 $173 $412
$20-30 20,735 1,364 6.60 15.82 $685 1.17 $502
$30-40 16,649 2,661 16.00 12.70 $1,919 3.29 $721
$40-50 12,208 3,436 28.10 9.31 $3,270 5.60 $952
$50-75 17,703 8,516 48.10 13.51 $11,005 18.86 $1,292
$75-100 7,817 5,590 71.50 5.96 $12,253 21.00 $2,192
$100-200 5,833 4,540 77.80 4.45 $16,359 28.04 $3,603
$200 & over 1,568 1,293 82.50 1.20 $12,624 21.64 $9,763
TOTAL 131,015 27,849 21.30   $58,335    
* The Joint Tax Committee Report shows a total of $47 million in MIDs among tax returns for the under $10,000 income category. This figure is five to 10 times higher than in JTC reports for 1993 and 1994. JTC economists acknowledge that the 1995 figure is inaccurate, probably due to a sampling error. Even so, compared with the $58.3 billion total, the number is so small that it has little impact on the distribution of benefits among income categories. 

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