The mortgage interest deduction (MID) is one of the biggest drivers of racial housing inequality, a new report says.
The report, published by the Institute on Assets and Social Policy at Brandeis University’s Heller School (IASP) and National Low Income Housing Coalition (NLIHC), comes on the heels of a recent report by Apartment List that found the federal government pays out more than twice as much to homeowners through MID than it spends on public housing programs.
“We spend billions of dollars a year providing federal housing assistance to higher income households who would be stably housed without that subsidy, while we spend far too little helping low income renters struggling to pay the rent,” said NLIHC President and CEO Diane Yentel.
MID — a tax subsidy which allows homeowners to write off the amount of interest they paid on their mortgage — costs taxpayers roughly $71 billion annually, but most of that expense goes primarily towards wealthier homeowners, as wealthier individuals are more likely to own (often multiple properties) rather than rent. Lower income individuals also are more likely to opt for taking the standard deduction when filing their taxes.
According to the study, black and Hispanic homeowners receive far less than their fair share when it comes to allocation of MID expenditures. Together, they account for 26 percent of the nation’s homeowners. However they only receive approximately 13 percent of the tax benefits. That amounts to nearly $9 billion directed away from black and Hispanic homes, versus a theoretical program in which the funds would have been distributed equitably. White homeowners receive nearly 78 percent but make up only 68 percent of the country’s homeowning population.
“The facts show that [MID] is a massive redistribution of wealth from families of color to wealthy homeowners,” a statement from the IASP research team said.
The study also states that $55 billion of the total $71 billion spent on MID goes to homeowners reporting annual incomes over $100,000, and $10.5 billion goes to households in the top one percent.
As Republicans in Congress mull comprehensive tax reform being proposed by the Trump administration, MID has early been one of the “hands-off” topics, but it’s potentially beneficial for taxpayers to make it a topic of public debate, especially as President Trump boasts about a tax plan that will “cut taxes for everyday, hardworking Americans.”
In fact, outright reforming MID with no other changes to the tax code could theoretically reduce the racial and class inequality in housing expenditures, creating a more equitable system for all — even non-homeowners.
One of the report’s suggestions would be to change MID to a tax credit that all homeowners are eligible for, not just those who qualify and file for itemized deductions. Supposed deduction incentives would be left in place (which has many real estate professionals bullish about eliminating MID) and made available to all rather than just the wealthy.
Furthermore, evidence to prove claims that MID helps boost homeownership remains murky. A 2017 study of Denmark’s housing market found, that MID does not incentivize homeownership, but it does incentivize buying more expensive homes and increasing homeownership debt.
The report also recommends lowering the cap on the amount of a mortgage eligible for a tax break from $1 million to $500,000.
It’s estimated that the two reforms would result in a net gain of $241 billion over 10 years, which could then be reinvested in public housing programs like Section 8, or the Department of Housing and Urban Development’s Housing Trust Fund program.