Rethinking Tax Breaks for Homeowners

July 2, 2013

The popular narrative of homeownership being the American dream is found on both sides of the political spectrum, along with strong political support for tax policies that heavily favor owner-occupied housing over rental housing. According to the Congressional Budget Office, the effective tax rate on owner-occupied housing is negative, while the effective tax rate on rental housing is around 18 percent, says Sita Nataraj Slavov, a resident scholar at the American Enterprise Institute.

If homeownership has spillover benefits to people other than the homeowner -- for example, if it strengthens communities or improves children's outcomes -- then it might merit favorable tax treatment. If not, then it's better to let the market decide whether people own or rent. Unfortunately, the evidence for the spillover benefits of homeownership is weak at best. As policymakers consider fundamental tax reform, they should revisit the arguments offered for homeownership tax breaks.

Some recent studies have provided support for the view that homeowners are different from renters in subtle ways that are difficult to measure and control for.

  • For example, in a 2009 article, David Barker and Eric Miller showed that controlling for additional differences between homeowners and renters casts doubt on the relationship between homeownership and children's outcomes.
  • The lack of a clear causal link between homeownership and good citizenship was also confirmed in a 2010 article by Gary Engelhardt, Michael Eriksen, William Gale and Gregory Mills.
  • This study was based on a randomized experiment, the best kind of setup for examining questions like this.
  • In the experiment, participants in Tulsa, Oklahoma, were randomly assigned to either a treatment group -- which received generous matching funds for saving toward buying a new home -- or a control group, which received no matching funds.
  • Thanks to the random assignment, one would expect individuals in the treatment group to be similar to those in the control group.
  • The authors found no evidence that promoting homeownership among individuals in the treatment group increased their political participation or other forms of community involvement.

As policymakers reevaluate popular tax breaks in the face of growing revenue needs, they should carefully rethink the rationale for favoring homeownership over renting. On balance, there is no clear evidence to suggest that homeownership causes stronger communities or better outcomes for children. Reducing or eliminating subsidies for homeownership may therefore both raise revenue and improve economic performance.

Source: Sita Slavov, "Rethinking Tax Breaks for Homeowners," U.S. News & World Report, June 27, 2013.

 

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