The U.S. federal tax code provides large subsidies, in the form of tax breaks, for housing consumption. These tax breaks include the deductions for mortgage interest and property taxes, as well as the capital gains exclusion on home sale profits. Together, these tax breaks amount to $175 billion in foregone revenues to the U.S. Treasury each year.
For millions of families who struggle to afford a house, these tax breaks offer no relief at all. Most personal income tax filers take the standard deduction, rather than itemizing deductions. Because most tax breaks are in the form of deductions, and the tax code has a progressive rate structure, the benefits from housing tax breaks increase disproportionately with income.
Benefits from the largest housing tax break, the deduction for mortgage interest, differ across metropolitan areas and among income groups within metropolitan areas. We find the mortgage interest deduction overwhelmingly benefits taxpayers earning more than $100,000 per year across all metropolitan areas in our sample. We also find that major metropolitan areas on the East and West coasts get the most tax relief from the mortgage interest deduction.
Within metropolitan areas, benefits from the mortgage interest deduction accrue almost entirely to taxpayers in suburban and exurban areas. We demonstrate that the share of taxpayers benefiting from this deduction is in many cases 2 times as large in suburban areas as it is in inner city and inner ring suburbs.
Taking the sum total of all tax breaks for housing, we find they generate substantially different cost savings across metropolitan areas. These cost savings do not result in higher homeownership rates, but instead in the purchase of larger, more expensive homes. We estimate that houses today, depending on the metropolitan area in question, are from 250 to 1,000 square feet larger than they otherwise would be, owing to the package of tax breaks.
If increasing home ownership is to remain a goal of the federal government—and we are not convinced that it should be—then tax breaks for housing need to be reformed or eliminated. To encourage homeownership, federal housing subsidies should be more narrowly targeted to middle-income households buying inexpensive houses. With the congressional tax-writing committees hoping to accomplish comprehensive tax reform within the next year, housing tax breaks represent the best way to generate the revenue necessary to push tax rates down.
To download the authors’ detailed report on the impact of housing tax preferences in certain metropolitan statistical areas, please click here.
