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

Common Cause Magazine, Summer, 1994 by Vicki Kemper

"By and large it's very much a subsidy for the rich ... and the subsidy gets bigger the richer you are," says Gary Engelhardt, a professor of economics at Dartmouth College. "Why should we be subsidizing million-dollar homes? If we're interested in promoting homeownership through all classes, we have to ask if there are other ways to use this money." John Atlas, president of the non-profit National Housing Institute, agrees: "There is no connection between a tax subsidy to the very rich and people who are closed out of the housing market."

Eliminating the mortgage interest deduction would save a huge amount of money, even if buyers then took out fewer and smaller mortgages: more than $25 billion next year and $254 billion over five years, according to the Congressional Budget Office (CBO). But let's be real: Nobody even pretends it's possible to do away with it. Despite these times of deficit reduction, federal belttightening and a bipartisan aversion to government spending, costly homeowner subsidies are perceived as politically untouchable.

Many experts attribute the deduction's sacred cow status to the substantial power of the traditional lobbies of the real estate, home building and lending industries; in the 1990 and '92 congressional election cycles the political action committee of the National Association of Realtors made more contributions to congressional candidates than any other group. But the deduction's staying power has just as much to do with the less visible influence of tens of millions of homeowners who benefit from it, including not only the middle-class owners of tract houses who count on it but also the owners of showcase homes and vacation villas who could make do without it, housing industry officials admit.

But even advocates for the homeless and the poor acknowledge the importance of the deduction to millions of American families, hastening to add that they're not out to do away with it. "Everybody lives in some kind of subsidized housing," says Peter Dreier, a professor of public policy at Occidental College and a long-time activist for fair housing policy. What housing advocates and some economists want to do is make the nation's housing policies more fair; they insist there are ways to open the doors to decent housing and homeownership for more low- and moderate-income families while continuing to help middle-class Americans cover their housing costs.

Some proposals would limit slightly the amount of mortgage principal eligible for the interest deduction and do away with mortgage deductions for second homes. These measures alone would save more than $34 billion over the next five years, according to the CBO -- while affecting only 3 percent of homeowners who take the deduction. Some analysts would replace the mortgage deduction with a homeowner's tax credit pegged to income. Dreier says a tax credit would give all homeowners a tax break, including many moderate-income families who don't now take the deduction (because its value is less than their standard deductions), while stimulating the housing industry. "This is not an anti-homeownership approach but a pro-homeownership approach," he says.