Deductio ad absurdum. Want a government subsidy of $225,000 a year? Buy a mansion - includes related article

Washington Monthly, Feb, 1990 by Peter Dreier, John Atlas

Want a government subsidy of $225,000 a

ear? Buy a mansion.

When President Bush unveiled his new housing program last November at a National Association of Realtors convention, the news media focused on his plans to aid the homeless, assist public housing tenants who want to buy their apartments, and provide matching grants to cities for housing rehabilitation-an extremely modest initiative totalling about $1.2 billion per year in new federal housing funds.

Especially modest given that during the Reagan years, the homeowner tax break was the only housing subsidy that did not fall to the budget axe. Housing assistance for the poor shouldered the most severe cutbacks of any domestic programs-a 75 percent reduction from $33 billion to under $8 billion. Today, less than one-third of all low-income Americans receive any kind of housing subsidy. This is the lowest level of any major industrial nation what reporters downplayed or ignored was the president's brief comment confirming his continued support for the homeowner tax deduction-a $34 billion annual federal subsidy that primarily benefits the wealthy.

Eliminating this tax break for the rich-while preserving it for the middle-class-could provide substantial money to finance housing assistance for low-income families, reduce the deficit, or fund other needed government programs.

To achieve this progressive tax reform will require Congress to overcome powerful political and ideological obstacles. The major political obstacle to reform is the real estate lobby-particularly the national associations of realtors, homebuilders, and mortgage bankers. Their political action committees have a vast local network and deep pockets. The housing industry argues that the homeowner tax break is the linchpin of the American dream. Without it, they argue, many Americans-including many young families-could not afford to purchase a home. Few congressmen want to offend these generous campaign contributors or be labeled as anti-homeownership. In fact, 245 members of the House of Representatives last year endorsed a resolution, sponsored by Rep. Marge Roukema on behalf of the housing industry, pledging their support for the existing homeowner tax break.

The real estate lobby, however, is engaged in ideological overkill. No one wants to repeal the entire homeowner tax deduction. But it can be reformed so that it primarily benefits poor and middle-class home buyers, while eliminating an expensive and unnecessary tax subsidy for the rich.

What's all the fuss about?

The federal tax code allows homeowners to deduct all property tax and mortgage interest from their income taxes. This will cost the federal government $34 billion in lost revenues this year alone, according to the Joint Taxation Committee. This amount is more than four times Bush's HUD budget for low-income housing.

The homeowner deduction is a government subsidy that goes primarily to the affluent. Over 78 percent of the foregone tax revenue goes to the 15.1 percent of taxpayers who earn over $50,000. One third of this subsidy goes to the 3.1 percent of taxpayers with annual incomes over $100,000. One half of all homeowners do not claim deductions at all. Tenants, of course, don't even qualify.

In other words, our nation's housing subsidies disproportionately benefit homeowners with high incomes or with more than one home. For example, Senator John D. (Jay) Rockefeller of West Virginia will receive a tax subsidy worth about $233,000 per year just on his $15.3 million Washington mansion. This amount would provide rent subsidies for about 5,000 low-income tenants-roughly the size of the homeless population in the nation's capital.

"I have no objections when the deduction goes for houses," says Rep. Sam Gibbons, senior Ways and Means Committee member. "When it goes for castles, I do."

Every president since Herbert Hoover has made home ownership a fundamental part of this nation's promise of prosperity. In the postwar period, the rate of home ownership in the U.S. rose steadily for three decades, from 44 percent in the late 1940s to 65.6 percent in 1980. Most of that increase was due to postwar federal housing programs, particularly longterm, low-interest, high leverage mortgages insured by the Federal Housing Administration or guaranteed by the Veterans' Administration. Cheap suburban land, subsidized highway construction, and rising income all contributed to the postwar boom. Only in the past decade-as housing prices skyrocketed, household incomes failed to keep pace with inflation, and federal housing programs were cut-has home ownership declined.

The homeowner tax deduction was never designed to be the costly element of housing policy that it has become. According to Marc Weiss, a Columbia University professor currently writing a book on the history of home ownership, the deduction grew almost by accident. By the time Brookings Institution economists began suggesting in the 1960s and 1970s that the homeowner deduction was inequitable and unnecessary, real estate lobbyists were already declaring it sacrosanct.