Policymakers in Washington are being called on to scrap the universal federal tax deduction for mortgage interest, and instead to target the write-off solely to first-time home buyers.
The proposal is one of several put forth in a new paper from the non-partisan Urban Institute (UI) to promote affordable housing by changing the tax code. But it's likely to be the one that is the most controversial, not to mention one that trade groups like the Mortgage Bankers Association (MBA), National Housing of Home Builders (NAHB), and the National Association of Realtors (NAR) will oppose with all their might.
The sacrosanct deduction allows taxpayers to subtract the interest they pay on mortgages up $750,000 from their taxable income. But it’s only available to those who file itemized returns.
Those filers tend to be higher-income borrowers, the paper’s authors, Aniket Mehrotra and Gabriella Garriga, point out. Therefore, they benefit at the expense of lower-income borrowers who elect to take the standard deduction. And the write-off, they say, costs the government billions every year.
The paper also calls into question deductions for state and local taxes and the capital gains exclusion when selling a house and buying another. While the authors don’t make any recommendations about them, they do point out that taken together, the wealthiest home owners received a total of $259 billion in benefits.
That breaks down to $29 billion for the mortgage interest deduction, $59 billion for the capital gains exclusion, and $164 billion from the write-off for imputed rent. That amount dwarfs all other subsidies for affordable housing production, low- and middle-income renters, and first-time buyers, the authors report.
Mehrotra is a policy coordinator in UI’s Housing Finance Policy Center. Garriga is a research analyst in the Urban-Brookings Tax Policy Center.
Another proposal is to expand the Low-Income Housing Tax Credit (LIHTC) program — which, while not perfect, Mehrotra and Garriga concede, is the only vehicle through which affordable rental housing is being built. Here, the authors suggest increasing LIHTC tax credit allocations and lower the threshold for developers to qualify.
If lawmakers followed this proposition, some 2 million more rental units could be built annually.
A third suggestion would provide incentive to build and rehabilitate affordable houses for sale. While 70% of the nation’s housing stock is made up of single-family houses, there is a “dwindling” supply of starter houses, the paper points out.
Here, Mehrotra and Garriga propose that Congress "build off the public-private partnership model of the LIHTC" by allocating tax credits for the construction and rehab of starter units — in particular, those for sale to people who will occupy them, as opposed to investors who would turn them into rentals.
Noting that tax and housing policy “have long been intertwined,” the authors write, “there are many tools federal, state, and local governments can use to improve supply and affordability.”
But the tax code is “critical,” they emphasize, arguing that could be reworked to use as a catalyst for new housing production and better-targeted subsidies.
