R Street paper encourages re-examination of housing tax breaks
Panel discussion to take place on Thursday on Capitol Hill
WASHINGTON (April 22, 2014) – Housing tax breaks in the current tax code disproportionately benefit the wealthy and should be reformed or eliminated, argue three economists in a paper titled “Homesick: How Housing Tax Breaks Benefit the Wealthy and Create McMansions” released by the R Street Institute today.
The three economists, Andrew Hanson, associate professor of economics at Marquette University and associate fellow at R Street; Ike Brannon, president of consulting firm Capital Policy Analytics and head of the Savings and Retirement Foundation and a growth fellow at the George W. Bush Institute; and Zackary Hawley, assistant professor of economics at Texas Christian University, examined how tax breaks benefit homeowners in different areas and at different income levels.
“These cost savings do not result in higher home ownership rates, but instead in the purchase of larger, more expensive homes,” write the authors. “There is no reason for the government to provide financial encouragement for people to buy bigger and better homes.”
The authors draw four concrete conclusions from their findings. First, the value of the mortgage interest deduction (MID) differs vastly across income groups and metropolitan areas. Second, the benefits of the MID are heavily skewed toward suburban areas of major cities. Third, the total package of housing tax breaks greatly reduces the cost of consuming housing, but does so unevenly across metropolitan areas. Finally, the cost reduction caused by housing tax breaks does little to induce homeownership, but instead contributes to the building of larger, “McMansion”-style homes. Detailed spreadsheets of the authors’ research across local markets can be found here.
In addition to not achieving their stated purpose, the authors write that the tax breaks represent millions of dollars that could be taken in by the U.S. Treasury.
“The cost of the tax benefits for owner-occupied housing sum to $175 billion per annum,” the authors write. “The mortgage interest deduction alone is costing the U.S. Treasury roughly $100 billion each year.”
The authors recommend common sense reforms that have been endorsed by both Republicans and Democrats to the tax breaks. These recommendations include capping the size of mortgages that qualify for subsidy, eliminating the deductibility of mortgage interest in favor of a tax credit and eliminating tax breaks on anything but a primary residence.
The R Street Institute is hosting an event to discuss the paper and its findings on Thursday, April 24 in the Canon House Office Building on Capitol Hill at 12:00 p.m. The event is open to the public and will feature remarks by co-author Andrew Hanson, Alan Viard from the American Enterprise Institute and Benjamin Harris from the Brookings Institution. To find more information or RSVP to attend the event, please click here.