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

Common Cause Magazine, Summer, 1994 by Vicki Kemper

There are four major federal tax "expenditures" or subsidies to homeowners. The largest, the mortgage interest deduction, gives homeowners roughly $1 in tax deductions for every $1 they pay in mortgage interest -- a benefit the Joint Committee on Taxation projects will cost the Treasury $47.1 billion next year. Since the mid-1980s deductible interest has been limited to mortgage loans on no more than two homes and totaling no more than $1 million. But as a Washington Post writer noted recently, the $1 million cap still "can net high-income taxpayers tens of thousands of dollars in tax savings."

Part of the mortgage interest deduction cost to taxpayers comes through a mortgage-related loophole that was created when the 1986 tax reforms eliminated tax deductions for interest on car and school loans. As the Post writer noted in the same column, home equity loans let homeowners "borrow as much as $100,000 to pay off consumer loans -- credit cards, car loans, personal lines of credit -- and deduct the interest."

And they do. Massachusetts Institute of Technology economist James Poterba found that home mortgage debt increased 86 percent from 1985 to 1991 -- thanks in large part to the new financing fad of home equity loans and second mortgages.

Homeowners also get a break on their property taxes, deducting the value of state and local taxes paid on owner-occupied housing to the tune of $14.4 billion next year. A third deduction, commonly known as the "rollover," allows taxpayers to defer capital gains taxes on a house they're selling if they're buying one that's more expensive. That provision will cost the Treasury $14.8 billion next year. Finally there's the "once-a-lifetime" exclusion, which will cost taxpayers $4.9 billion next year. It exempts from capital gains taxes the first $125,000 in profit realized by a home seller 55 or older.

The government subsidizes homeownership -- and the housing industry -- in myriad other ways as well. From the hundreds of billions of dollars in mortgages and securities it insures and guarantees, to the hundreds of millions of dollars spent to subsidize flood insurance policies and pay damage claims, to a recent Internal Revenue Service rule change allowing homebuyers to deduct loan "points" paid by sellers, federal taxation policies and expenditures make life easier for tens of millions of homeowners.

The mortgage interest deduction and other pro-homeownership policies have become a fundamental part of federal tax policy and a foundation on which much of the nation's real estate, home building and banking industries are built. As a result, efforts to change the deduction hit all Americans -- including lawmakers and other government officials -- close to home. And behind the extreme aversion to reform are some natural concerns that any change would disrupt personal lifestyles as well as huge segments of the economy.

Would-be reformers identified the costs -- and the inequities -- long ago. The Kennedy administration withdrew its proposal to limit the mortgage deduction, along with all personal income tax deductions, after members of Congress were lobbied by housing-related industries. In 1969 President Nixon's housing secretary floated a proposal to do away with the deductions altogether and use the resulting tax revenue "to meet the problems of the slums," but the idea went nowhere.