Shelterforce, March/April 1995 #80

Where We Stand
Reform the Mansion Subsidy-Now!

by John Atlas

The sacred cow of the American tax code-the mortgage interest deduction-seems to be losing its aura. Politicians and pundits not known for their support of progressive causes have begun to echo NHI's call to examine the deduction that's become a subsidy for the rich. Have they been listening to us?

In March, Peter Dreier presented arguments against the mansion subsidy on National Public Radio's Marketplace program. That, in turn, spurred a flurry of interests from journalists across the country. Editorials by Dreier and other NHI board members soon appeared in newspapers from New York Newsday to the Sacramento Bee. In its April 10 cover story on entitlements, U.S. News and World Report cites NHI's research and conclusions on the mortgage interest deduction.

The mansion subsidy is now in play. And the latest player to chime in is William Safire, the conservative columnist for the New York Times.

In Safire's April 20 column, he calls for a modified flat tax and suggests that the deduction should be capped at $250,000 from the current $1 million. After all, he argues, "if you can't afford a million-dollar mansion on your own money, don't buy one." In suggesting that this tax deduction-which cost the federal government some $51 billion in 1994-needs reform, Safire is exactly right.

This deduction, designed to encourage homeownership, actually subsidizes the rich to buy huge homes without helping most working families buy even a small bungalow. With only a simple change, it can help thousands of low- and moderate-families joins the ranks of homeowners.

Only one-fifth of the 28 million households with incomes between $30,000 and $50,000 use the homeowner subsidy, while fewer than ten percent of those earning under $30,000 use it. Half of all homeowners do not itemize deductions at all, so they get no help. Tenants don't even qualify.

The current mortgage interest deduction-which, according to the Congressional Joint Tax Committee, will cost $68 billion by 1999-is a government subsidy that goes primarily to those with the highest incomes and the most expensive homes. Almost half of last year's $51 billion went to 5.2 percent of taxpayers with incomes over $100,000, and 16.5percent went to the wealthiest one percent of taxpayers with incomes over $200,000. The wealthy, many living in mansions, receive mortgage tax breaks averaging $8,457.

Safire joins the flat-taxers and deficit hawks in calling for the reform of this tax loophole. His allies include Republican Senators Robert Packwood (OR) and Richard Shelby (AL), Ross Perot, Alice Rivlen and David Stockman (Directors of the Office of Management and Budget for President Clinton and Reagan, reaspectively), the Concord Coalition headed by former Senators Warren Rudman and Paul Tsongas, and Forbes Magazine.

Flat tax advocates are bent on eliminating the deduction and deficit hawks want to cap the mortgage tax break by lowering the ceiling. While these proposals reduce subsidies for the wealthy and reduce the deficit, they do nothing to expand homeownership for hardworking low- and moderate-income families.

Middle-class and low-income families need help. During the Reagan and Bush years, homeownership rates plummeted, especially among young families. Under Clinton, construction and sales of single-family homes have improved, partly due to rising incomes and partly the result of the Clinton Administration's revitalization of the Federal Housing Administration as an insurer of single-family mortgages. Despite this progress, the vast majority of young families are still shut out of the home-buying market.

Safire and the others are helping to expose the myths of the mortgage interest deduction. An opportunity exists now to reform the tax code in order to expand homeownership by simply changing the mortgage interest deduction into a progressive homeowner tax credit. It would work just like the successful earned-income tax credit for low-wage workers but reach into the middle class.

The tax credit would limit subsidies for the wealthy but preserve them for the poor and the middle-class, including those who currently do not itemize their deductions. By turning the mortgage interest deduction into a progressive tax credit, the same $51 billion would help many more families become (and remain) homeowners. The wealthy will continue to purchase homes with or without a tax subsidy. Moreover, by increasing the demand for homes, a progressive homeowner tax credit would help the housing industry (builders, brokers, and bankers) create jobs, improve the nation's economy, and add to local tax bases.

We must urge our federal representatives to abolish one of the country's most regressive taxes by reforming this subsidy now. They should do this not as deficit hawks or flat-taxers, but in order to fulfill their promise to help low-income and middle-class citizens achieve the American dream.

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