Housing Tax Breaks Create Inequality, Benefit Democrats

April 1, 2014

Much of the inequality debate today has focused on things that the federal government should be doing -- raising the minimum wage, for example, or increasing taxes on the wealthy. But what about things that the federal government should not be doing, asks Washington Post editorial writer Charles Lane.

Lane points to Washington policies that push the income distribution upward -- specifically, exemptions in the tax code.

  • Of the $1 trillion in annual federal tax expenditures, housing breaks in the tax code constitute 15 percent.
  • The tax code allows deductions for mortgage interest and property taxes (at a projected cost to the Treasury of a respective $70.3 billion and $31.7 billion in 2014), and capital gains on home sales up to $500,000 are also tax-free (at an estimated cost of $52.5 billion).
  • These tax breaks benefit those in higher income tiers -- 73 percent of the mortgage-interest deduction goes to the top 20 percent, and 30 percent of the deduction goes to the top 1 percent of income earners.

Are the tax breaks actually increasing home ownership? According to a study from the R Street Institute, no. Rather, the provisions are helping those who can afford homes purchase bigger ones.

  • The study looked at IRS data and local housing market information, determining that subsidies in the tax code increase the average home size somewhere between 11 percent and 18 percent above what it would have been.
  • In Washington, D.C., area, for example, the average home size was 1,424 square feet larger with the tax subsidies.
  • The benefits are also distributed unevenly depending upon location. In Atlanta, yearly savings with the housing tax breaks are $1,628, whereas in Washington, D.C., average savings are more than $9,000 annually.

An unstated implication is that these tax breaks are disproportionately subsidizing blue areas. Boston, San Francisco, Seattle, Los Angeles and New York -- in addition to D.C. -- are the biggest winners in dollar terms and square footage. All of these areas voted President Obama into office by wide margins in the last election cycle, and all are represented by liberal Democrats in Congress.

Somewhat circularly, these are the same areas that are fighting to fix inequality through the minimum wage and higher taxes, and yet with tax and marginal rate increases, taxpayers become more reliant on these housing deductions, which Lane describes as "inequality-generating."

Source: Charles Lane, "Fixing One Driver of Inequality May Hit Close to Home for Some Progressives," Washington Post, March 26, 2014.

 

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