Shelterforce, Jan/Feb 1995

Where We Stand
National Association of Home Builders Concedes-Mansion Subsidy is Unfair!

by Peter Dreier and John Atlas

The chief economist for the National Association of Home Builders (NAHB) recently admitted that the housing lobby is losing the public debate over the mortgage interest deduction.

For several years, NHI has been engaged in a relentless attack on what it calls the "mansion subsidy"-the mortgage interest deduction that primarily benefits the rich. In articles in dozens of daily newspapers, general magazines, and academic publications, NHI has pointed out that the tax break for homeowners, which totaled $51 billion last year alone, is "welfare for the rich." Most of this government subsidy goes to affluent homeowners, while most middle-income families and almost all poor families get nothing. Other countries, including Canada, have a comparable homeownership rate without providing comparable tax breaks.

But in the February 1995 issue of the NAHB's magazine, Builder, chief economist David F. Seiders acknowledges that the "once-sacred" tax break is now on the defensive. Although Seiders does not mention NHI by name, he paraphrases NHI's critique and concedes that it is essentially on the mark.

In the article, Seiders recognizes that "questions are being raised about the deduction's cost-effectiveness as a tool to broaden homeownership." Echoing NHI, he notes that "frankly, it's possible to find countries with homeownership rates comparable to those of the United States without deductions."

Tellingly, Seiders also acknowledges that "it's also hard to defend the deduction in terms of equality or fairness"-a point that NHI has consistently raised.

"Some characterize the deduction as 'welfare for the rich,'" Seiders notes, repeating the phrase that NHI has popularized in its attack on what we also call the "mansion subsidy." Seiders goes on to admit that "If the deduction were eliminated or capped even lower, it would fit with the Clinton administration's theory of 'progressive restructuring' of the tax system."

Seiders warns his audience of homebuilders that "[I]t's going to be hard to defend the mortgage-interest deduction using only the old arguments about homeownership and the democratic process. It's time to expose the real consequences of tampering with the deduction."

Searching for a new weapon to defend this regressive tax break, Seiders comes up with the following: "...the value of the deduction is now largely built into house values, and eliminating or reducing the deductibility of mortgage interest will cause big declines in property values," leading to "widespread mortgage defaults," bank failures and a "serious economic recession."

But Seiders is crying wolf. NHI wants to reform, not eliminate, homeowner tax subsidies by replacing the mortgage interest deduction with a progressive tax credit for homeownership.

The tax credit would be available to all families each year-including those moderate-income households that do not itemize their deductions. Tying the credit progressively to income would limit subsidies for the wealthy, but preserve them for the middle class. It would also add a large number of families who currently do not benefit. Its mechanics would be similar to the earned income tax credit for low-wage earners, but reach a much broader income range. The credit could be adjusted for regional housing costs in order to avoid penalizing homebuyers and homeowners in high-cost areas like California. This would address the phantom problem that Seiders raises of mortgage default in high-cost areas.

Most important, by increasing the demand for homes, a progressive homeowner tax credit system would help the housing industry (builders, brokers, and mortgage lenders) create jobs, improve the nation's economy, and add to local tax bases. Because housing demand is more elastic at the bottom and middle parts of the economy, a $50 billion annual homeowner tax credit could make the difference between renting and owning for millions of working families. It would be a real boon to the housing industry, if only they could look beyond their shortsighted defense of the current system.

Of course, we shouldn't underestimate the political clout of the NAHB and its allies among the Realtors and mortgage bankers. But Seiders article is an encouraging sign that the housing industry is starting to lose confidence in its ability to defend the deduction from attacks by NHI and other groups.

Peter Dreier is a professor at Occidental College in Los Angeles a board member of the National Housing Institute and John Atlas is President of NHI.

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