The mortgage interest deduction plays an important role in helping many American families purchase a home. Fiercely protected by upper and middle class home-buyers, the deduction has helped make home ownership more affordable for many households, but the mortgage deduction disproportionately helps higher income families.
Families with incomes in the highest 20 percent of taxpayers (with family incomes of more than $129,219) receive, on average, 13 times more in tax savings thanks to the home mortgage interest deduction than do families in the middle of the income distribution (with incomes of $45,475 -$76, 234).
If the mortgage interest deduction was eliminated, the wealthiest fifth of families would have to absorb 71 percent of the tax increases that would ensue. Almost no one with an income of less than $40,000 enjoys the benefits of the credit. Instead, the bulk of the benefit goes to the wealthiest Americans—those least likely to need help playing off a mortgage.
The federal government will lose $71.7 billion of potential income by allowing homeowners to deduct part of their mortgage interest in 2014, alone. At the same time, the federal government spent $46.7 billion on housing assistance in 2013. But thanks to cuts mandated by the Budget Control Act, federal investments in low-income housing have fallen by more than 25 percent (after adjusting for inflation) since 2010. Last year, 2.2 million American families benefitted from Housing Choice vouchers, the nation’s largest low-income rental assistance program. Even with vouchers, only 29 affordable and available units of housing are available for every 100 extremely low-income (ELI) renters.
The $71.4 billion in tax expenditures the federal government currently loses on the mortgage interest deduction could be used to help stop the loss of 10,000-15,000 units of public housing every year, which due to $25.6 billion in underfunding and unmet capital needs. The remaining $45.8 billion could be reinvested to more subsidize more affordable rental housing or to help the 8.7 million homeowners with incomes under $40,000 a year, who have severe housing cost burdens.
Direct spending and tax expenditures (exemptions) are often discussed as if they are completely different. In fact, as the graph shows, they can be two sides of the same coin. Allowing increasingly scarce public housing structures for low-income Americans to crumble from neglect, while providing tax exemptions on mortgages for the wealthy, is a particularly egregious example of the inequities of our current housing policies.
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