Caroline Rummel Just Won an A!

…or at least a nice letter to Professor Holcomb over at the University of Minnesota Law School. Caroline’s entry on “Why It’s Time to Take the Red Pen to the Home Mortgage Interest Deduction” come out on top in my legal writing contest.

I received a number of great entries and remain really impressed by the level of thought – and research – that went into many of them (boy, those folks at Harvard cite like mad). I chose Caroline’s entry because she offered a fresh and interesting perspective on the mortgage interest deduction – comparing it alongside Section 8 housing subsidies. Caroline’s entry was also the perfect length for a blog post (key, since some of you law students sure are wordy, which is saying something coming from me!) and her voice was really “on” – not too casual, but not too academic. Her entry really stood out for me – I hope you enjoy it. Read it over and leave Caroline a comment – and some kudos!

Why It’s Time to Take the Red Pen to the Home Mortgage Interest Deduction

“Under current law, there are no time limits. Those on [S]ection 8 can remain on [S]ection 8 for as long as they qualify. Is that fair to taxpayers? No. . . . I don’t think the taxpayers ought to be required to pay for this subsidized housing forever in some cases.”[1]

Ah, government subsidies. The oft-maligned payments, shouldered by upstanding, hardworking taxpayers, to cover the cost of housing for millionaires who need help paying the mortgage. Yes, you thought I was going to say “poor people who don’t work and expect a government handout.” I’ll give you a break, because over the years political posturing has led the word “subsidy” to become indelibly linked to that image.

However, the largest government housing subsidy is not a program serving the poor. Nope, it is a program open to people with million dollar mortgages and to people with luxury boats doubling as “second homes.” The federal tax code provides subsidies of $130 billion to homeowners through the home mortgage interest deduction (MID), lack of taxation of imputed rental income, and deductions for property taxes. The home mortgage interest deduction is so ingrained in U.S. tax policy that it is viewed as politically untouchable. In fact, the MID is one of the few deductions taxpayers are allowed to hold on to when calculating their liability under the Alternative Minimum Tax. Every year, homeowners are able to deduct the interest they pay on up to $1.1 million of indebtedness on up to two qualifying residences. This deduction is predicted to result in $89 billion of forgone tax revenue in fiscal year 2008. In 2006, the lost revenue was approximately $72.1 billion.

In contrast, Section 8 rental assistance, which helps low-income people by subsidizing their rent payments over thirty percent of their income, received just $15.846 billion in funding for FY 2007. Yet, unlike Section 8 rental assistance, the MID is neither seen as a subsidy nor in any danger of facing time limitations for how long a homeowner may claim it. There is no requirement that a taxpayer work in order to claim the deduction.

Yet the only difference between these two subsidies is the mechanism used to funnel the money to the recipients. Rather than going through an application process and sitting on a wait list for up to seven years, homeowners simply fill in the box on their returns, lowering their tax liability and instantly making their housing more affordable. Section 8 voucher recipients, on the other hand, have the government pay the money out to the landlord instead. Regardless of your views on appropriate levels of taxation, from a government expenditure standpoint these programs have the exact same effect – the government has less revenue because it has chosen to help these groups of people with their housing costs.

Now, many people have pointed out the wasteful nature of the MID before. Many people have also pointed out that it seems to be a political impossibility to reduce or eliminate the MID. But I think if people really thought about the policy behind it, they would see how unjustifiable an expense it really is. The federal government has a dismal history of racial discrimination in the housing field. It was a government agency, the Home Owners’ Loan Corporation, that created the concept of “redlining” neighborhoods based on their racial composition and refusing to back mortgages in predominantly black neighborhoods. It was another government agency, the Federal Housing Administration, that continued to advocate the use of racially restrictive covenants until two years after the Supreme Court declared them unconstitutional in Shelley v. Kraemer. Today there is a 28.6% gap between white homeownership rates and black homeownership rates, and a 25.2% gap between white homeownership and Hispanic homeownership.

So it’s not surprising that black renters are overly represented among the renter group as a whole. While 12.1% of the U.S. population as a whole is black, 29% of renters are black, the largest renter group after whites, who come in at 53% (but are underrepresented compared to their 69.1% share of the total U.S. population). Renting is a good solution for a lot of people in transition or who have other personal reasons for not wanting to own a home, but for many people it is simply the only option, and not an affordable one at that. Housing is considered affordable if it costs 30% or less of a household’s income, and 47% of renters were paying more than that as of 2006.

The point of all this is that the government has been helping households with their housing costs for over sixty years, through the introduction of the government-backed 30-year mortgage to the MID subsidy today. Because of its practices making it easier for white households than for black households to obtain mortgages, it is no surprise that black households have ended up disproportionately as renters.

It really is hard to come up with a reason why a person (in most housing markets in the nation, anyway) needs help paying the interest on a mortgage vastly higher than then national median home price (currently approximately $223,800). I’m not saying the MID should be taken away overnight. I’m just saying that when I see studies like the one conducted by the Congressional Budget Office in 2005 showing that cutting the MID ceiling to $500,000 of debt from $1.1 million would raise $48 billion over ten years, I think that additional $4.8 billion per year could increase Section 8 voucher funding by approximately 30% per year, providing a lot more help to people waiting for Section 8 vouchers and waiting for the federal government to finally atone for its discriminatory past.

taxgirl_mug.jpg

Caroline also wins a pound of organic coffee, a fabulous taxgirl mug (pictured above) and bragging rights. Congrats, Caroline, and good luck in your legal career!

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Comments

  1. Andrew

    I think there are some good points here- there is definitely a classist element to the mortgage interest deduction, and it definitely does cut along racial lines, but I think it is questionable whether homeowners actually receive much of a “benefit” from the deduction. There is a fairly strong argument (which also makes sense intuitively) that the value of the deduction results in higher home prices across the board. Thus, it seems the real beneficiaries of the deduction might in fact be homebuilders and real estate agents, while homeowners themselves have their benefit offset by the higher prices they’ve paid initially. Further, given that it’s a deduction rather than a credit, low-income homeowners may derive little to no value from the deduction (if their current marginal rate is zero because of nonrefundable credits and other deductions).

    By contrast, Section 8 vouchers, being used in a far smaller segment of the rental market than mortgage deductions in the purchase market, probably have less of a distortionary effect on prices, and are more likely to actually help their recipients than the mortgage deduction.

    Overall, I strongly agree that the deduction should be scaled back (it might make sense to limit it to the conforming loan threshold, which I believe is $417k), as it seems like an extremely inefficient way to encourage homeownership.

    But, um, good luck with that one. I can’t really think of a more entrenched deduction in the code.

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  4. andy

    good post. i hope you post some ‘honorable mentions’ as well.

  5. www.superhomerentals.com

    i own http://www.superhomerentals.com the only website that allows for section 8 listings i know first hand section 8 housing does help single moms and the main reason i help and list section 8 housing is for kids exiting foster care that need the housing or would be homeless -wow i am really impressed by your thoughts and the insite on this !

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