WSJ: Housing Sector Seeks No Tax Remodeling

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Housing Sector Seeks No Tax Remodeling

By JAMES R. HAGERTY
Staff Reporter of THE WALL STREET JOURNAL
January 31, 2005; Page A2

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The president's executive order, however, instructed the panel to recognize the "importance of homeownership" to America -- a reference to the tax deductibility of mortgage interest on home loans.

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Defenders of the deduction depict it as a way of helping more people afford to buy a home. In fact, the deduction does little to boost homeownership. The vast bulk of the benefits go to people who could easily afford a home even without a tax break. Nearly 80% of the benefits from the mortgage-interest and property-tax deductions go to the top 20% of taxpayers in terms of income, according to the Institute on Taxation and Economic Policy in Washington. Only 5% of the benefits go to people in the bottom 60% of the income scale -- those who may be struggling to afford a home.

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The cost of the mortgage-interest deduction for owner-occupied residences, in terms of forgone revenue for the government, is estimated at $69.9 billion for fiscal 2005. The deduction for property taxes costs an additional $16.7 billion, while the tax-free treatment of capital gains on sales of principal residences comes to $18 billion. Together, these breaks are by far the biggest government subsidy for housing.

One reason the benefits go mainly to the rich is that the mortgage-interest deduction is available only to people who itemize deductions on their tax returns. Few low-income people itemize because they can do better by taking the standard deduction. As a result, the mortgage-interest deduction serves largely to encourage wealthy people to spend more on housing because it cuts their aftertax cost of borrowing. That encourages builders to concentrate more of their resources on luxury homes and less on ordinary ones. Another reason the wealthy benefit disproportionately is that the tax code allows homeowners to deduct the interest on mortgage debt totaling as much as $1 million. That makes it easier for the well-heeled to also deduct the interest on a second home.

Two former U.S. housing secretaries -- Jack F. Kemp, a Republican, and Henry G. Cisneros, a Democrat -- recently proposed an overhaul of housing policy that would include a tax credit to help low-income people buy homes... Another way to help financially stretched home buyers would be to allow deductions for payments of mortgage insurance, which low-income people often have to buy because they can't make a large down payment. Sen. Gordon Smith, an Oregon Republican, plans to push for legislation that would allow such deductions. How could Congress justify creating new breaks when it needs to shrink the budget deficit? One way would be to claw back money from the mortgage-interest deduction. Congress could cut the maximum amount of mortgage borrowing on which interest can be deducted to $500,000 from the current $1 million. Or it could limit the deduction to one residence per taxpayer. "It's hard to justify why federal policy should subsidize second-home ownership," says Barbara Sard, director of housing policy at the Center on Budget and Policy Priorities, in Washington.

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Write to James R. Hagerty at [email protected]

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