Home inequity: one of the biggest entitlement programs is not for the poor

Common Cause Magazine, Summer, 1994 by Vicki Kemper

Beyond the exclusive development's entrance, with its carpet of purple pansies and a stand of young maple trees, down a winding road lined with a classic white fence, faux-antique street lamps, a bicycle path and more maple saplings, past the equestrian center, the playground and the championship golf course, across mansion-sprouting streets with names like Crimson Leaf Terrace, Beman Woods Way and Watts Mine Lane and lawns painstakingly landscaped and crawling with gardeners -- deep in this exquisitely engineered little world sits a model American dream home.

It's for sale.

The townhouse, which looks relatively modest from the outside, is anything but on the inside. And with 5,000 square feet, four levels, three wet bars, two staircases and an asking price of $749,000, it promises prospective buyers one markedly immodest mortgage.

Still, it's worth a look. Notice the 27 dramatically wide hardwood steps sweeping down from the foyer to the living room; take in the sunken master bedroom with its own fireplace, his-and-hers walk-in closets and three sets of French doors that open onto balconies with views of lush meadows; get lost in a master bathroom the size of some studio apartments; marvel at cedar closets, kitchen cabinets made of maple, the wine cellar. Did you miss the large party room and equally vast deck on the top floor? No problem; take the elevator back up.

Take a real good look. Because whether you buy this house or not -- even if your annual salary is no more than three months' mortgage payments -- you'll be helping to pay for it.

You'll "pay" in the form of federal handouts to homeowners such as mortgage interest and property tax deductions, as well as other writeoffs, subsidies and one key loophole -- valuable benefits that will cost the U.S. Treasury more than $81 billion next year. For this particular house the mortgage interest deduction alone will have federal taxpayers essentially writing a check for $18,000 to its buyers -- who would likely have an annual income of at least $200,000 -- in their first year of ownership.

And for each of some 850 taxpayer-subsidized American dream homes in the Avenel "community" just beyond the Washington Beltway in posh Potomac, Md., there are roughly 1,000 Americans without so much as a roof to sleep under, plus some 1,600 households who live in substandard housing or pay more than half their income for housing costs. Another vexing problem is the close-but-no-house status of some 4 million renter households whose rent is as much as most mortgages but are shut out of home-ownership by down payment and closingcost requirements. Almost a third of the country's households -- about 35 million -- live in rented housing and receive no federal tax benefits.

Yet most Americans strongly support the mortgage deduction -- even if they don't benefit from it. In fact, the 65 million households that own their own homes -- many of them fed up with the political influence of special interests -- constitute one of the country's largest and most special interests of all: American homeowners. But despite the strength of that group, the relative weakness of renter households and the absence of any organized movement to challenge the "homeowner's deduction," there is a new argument against the benefit: its enormous cost to a debt-ridden Treasury.

The mortgage interest deduction, adopted as part of the original tax code in 1913 to help family farmers and small-business owners pay down their debts, then expanded after World War II to give more families a foothold in the nation's booming economy, has become in effect one of the country's biggest and most expensive -- and sacrosanct -- entitlements, surpassed only by Social Security, Medicare and Medicaid.

Yet what is widely viewed as a middleclass entitlement, staunchly defended as a right of citizenship and portrayed as no less than the cornerstone of the American dream, is in fact so inequitable in its distribution as to be decidedly un-American, some experts say. Contrary to public perception of the benefit's impact, government figures show that the mortgage interest deduction favors the wealthy and that many middle-class taxpayers and homeowners reap no benefits whatsoever.

Households with incomes of more than $200,000 a year -- 0.7 percent of the population -- received 10.6 percent of the $41.6 billion in mortgage deduction benefits in 1993, while the 4.2 percent of households that earned between $100,000 and $200,000 a year took home more than a quarter. Meanwhile the 89 percent of households with annual incomes of less than $75,000 got just 41.1 percent of the deduction benefits, in part because fewer than 18 percent of them even took the deduction. It is because of this inequitable distribution -- plus indications that the deduction actually distorts the housing market by inflating prices and giving homebuyers a financial incentive to buy more house than they need -- that some analysts refer to the deduction as "the mansion subsidy."