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

The impact of the homeowner deduction in promoting home ownership is debatable. Neither Canada nor Australia have a homeowner deduction, and the homeownership rates are roughly the same as the U.S.

If anything, the deduction has helped push housing prices artificially up, because home buyers include the value of the tax subsidy in their purchase decision. It provides upper income home buyers with a tax shelter, encouraging them to view home-owning primarily as an investment, and to buy bigger homes, and more homes, than they need. And it certainly fueled the past decade's wave of housing speculation and the conversion of affordable apartments into expensive condominiums, promoting the gentrification of many urban neighborhoods.

What to do?

Two proposals make the most sense politically and economically. Both preserve the benefits for the broad middle class. Both close tax loopholes for the wealthy. And both generate substantial tax savings.

First, eliminate the subsidy for the most expensive homes and vacation villas by limiting mortgage interest deductions to $12,000 per single return or $20,000 per joint return, adjusted for inflation. These ceilings are higher than the deductions now taken by nearly all homeowners-in fact, they would affect less than one-half of 1 percent of all taxpayers. They would yield the federal government an additional $1.25 billion this year, according to the Joint Taxation Committee. According to a Congressional Budget Office study, it "would retain the basic incentive for homeownership, but would not subsidize the luxury component of the most expensive homes and vacation homes."

Second, phase out the deduction entirely for the rich. If the 3.9 million taxpayers with incomes over $100,000 (3.1 percent of all taxpayers), adjusted for inflation, were no longer eligible for homeowner tax breaks, the federal government would net an additional $11.6 billion a year. If the cut-off started at $200,000 (1 million taxpayers, representing 0.8 percent of all returns), new federal revenues would total $3.7 billion.

Despite dire warnings from the real estate lobby, neither proposal-singly or in combination-will have a significant impact on the homebuilding industry. The affluent will continue to buy large homes, and second homes, but the prices will reflect their real market value, rather than the artificial price that includes the government subsidy.

And that way, we could stop subsidizing the rich to live in castles, and help more Americans stay out of shelters.

THE WORST CITY GOVERNMENT

In St. Paul, Minnesota, government usually runs as clean as the water; the occasional scandal appearing in the local press usually has a dateline from Chicago. So imagine local eyebrows this winter, when a year-long Minneapolis Star Tribune investigation disclosed that veteran fire chief Steve Conroy and his staff had declined to investigate dozens of suspected arson cases while Conroy's brother Pat, a fire rehab specialist, harvested more than $1 million dollars repairing (and sometimes not repairing) the damage.