Housing Tax Expenditures
and the Economy
The GSEs, Housing, and the Economy
January 24, 2011
Todd Sinai, The Wharton School
Housing tax expenditures cost a lot
Tax expenditure
JCT 2011 estimate
Mortgage interest deduction
$93.8 billion
Property tax deduction
$22.8 billion
Capital gains tax exclusion
$16.5 billion
Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, December 15, 2010, p.39.
Housing tax expenditures cost a lot
Tax expenditure
JCT 2011 estimate
Mortgage interest deduction
$93.8 billion
Property tax deduction
$22.8 billion
Capital gains tax exclusion
$16.5 billion
Total:*
≈$133.1 billion
*The JCT does not agree with totaling tax expenditures in this way.
Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, December 15, 2010, p.39.
Housing tax expenditures cost a lot
Tax expenditure
JCT 2011 estimate
Mortgage interest deduction
$93.8 billion
Property tax deduction
$22.8 billion
Capital gains tax exclusion
$16.5 billion
Total:*
≈$133.1 billion
Projected 2011 deficit (CBO):
$1,066 billion
Share of deficit:
12.5 percent
*The JCT does not agree with totaling tax expenditures in this way.
Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, December 15, 2010, p.39.
Housing tax subsidies are even bigger
Tax expenditure
JCT 2011 estimate
P-S 2003 estimate*
Mortgage interest deduction
$93.8 billion
$72 billion
Property tax deduction
$22.8 billion
$24 billion
Capital gains tax exclusion
$16.5 billion
≈$230 billion
Untaxed return on housing equity
Total:
≈$133.1 billion
Projected 2011 deficit (CBO):
$1,066 billion
Share of deficit:
12.5 percent
$330 billion
*P-S estimates include Federal and State taxes.
Source: J. Poterba and T. Sinai, Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing, 2010
Who benefits from the
mortgage interest deduction?
High benefit
 High-income households
 Younger households
Low benefit
 Low-income households
 Seniors
Who benefits from the
mortgage interest deduction?
High benefit
 High-income households
 Younger households


High marginal tax rates
More debt
Low benefit
 Low-income households
 Seniors


Seniors have little
mortgage debt
Low-income households
rarely itemize
Who benefits from the
mortgage interest deduction?
Per-Household Tax Savings From the Mortgage Interest Deduction
Annual Household Income
Age
<40K
40-75K
75-125K
125-250K
250+
All
25-35
212
571
1,801
3,468
7,711
1,132
35-50
244
747
1,525
3,534
6,575
1,639
50-65
161
491
1,034
2,095
5,741
1,194
> 65
21
178
329
981
1,322
166
All
109
542
1,262
2,697
5,408
1,066
Source: 2003 data from the Survey of Consumer Finances
Source: J. Poterba and T. Sinai, Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing, 2010
The MID reduces housing costs…

Lowers out-of-pocket costs for existing home owners
 Eliminating the MID reduces disposable income
 This is why tax reform proposals bundle changes to
the MID with offsetting changes elsewhere in the tax
code
The MID reduces housing costs…

Lowers out-of-pocket costs for existing home owners
 Eliminating the MID reduces disposable income
 This is why tax reform proposals bundle changes to
the MID with offsetting changes elsewhere in the tax
code
…but it encourages housing spending

Reduces the relative cost of housing by 6 percent
 People spend more on subsidized things
 Leads to more dollars being spent on housing

3 to 6 percent more
The MID reduces housing costs…

Lowers out-of-pocket costs for existing home owners
 Eliminating the MID reduces disposable income
 This is why tax reform proposals bundle changes to
the MID with offsetting changes elsewhere in the tax
code
…but it encourages housing spending

Reduces the relative cost of housing by 6 percent
 People spend more on subsidized
How things
much varies:
5% for
low-income
 Leads to more dollars being spent
onyoung,
housing

3 to 6 percent more
20% for young, high-income
1% for older, any-income
The MID treats debt and equity finance
of housing neutrally


Current tax code subsidizes equity and debt investment
in houses
Eliminating the MID would discourage the use of
mortgage finance
 Equity investment in housing would still be tax-favored
 Households who could replace debt with equity, would
High-income and older households can
substitute equity for housing debt
Fraction of Outstanding Deductible Mortgage Debt that Homeowners
Could Replace by Drawing Down Financial Assets
Annual Household Income
Age
<40K
40-75K
75-125K
125-250K
250+
All
25-35
5.5
13.4
15.3
17.3
56.7
14.9
35-50
9.7
12.1
17.4
34.6
68.2
25.7
50-65
21.5
25.7
30.1
38.6
73.4
40.5
> 65
26.1
26.6
42.5
63.3
94.6
40.0
All
15.1
16.1
21.5
35.5
71.5
29.2
Source: 2003 data from the Survey of Consumer Finances
Source: J. Poterba and T. Sinai, Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing, 2010
The MID supports house prices



Housing subsidies increase willingness-to-pay
Effect on house prices varies across the U.S.
 Subsidy is highest in places with high incomes and
high house prices
 Those places experience the most capitalization into
house prices
California, Northeast Corridor are the big winners
Distribution of housing tax subsidy
across states (1990 data)
Figure 3: Value of Net Tax Benefits per Owner-Occupied Housing Unit
(Proportional Financing)
$10,000
$8,000
$6,000
$4,000
$2,000
$0
HAWAII
DIST. COLUMBIA
CALIFORNIA
CONNECTICUT
NEW YORK
MASSACHUSETTS
NEW JERSEY
RHODE ISLAND
MARYLAND
NEW HAMPSHIRE
VIRGINIA
WASHINGTON
MAINE
DELAWARE
NEVADA
ILLINOIS
VERMONT
OREGON
FLORIDA
NEW MEXICO
ARIZONA
COLORADO
GEORGIA
PENNSYLVANIA
NORTH CAROLINA
TEXAS
ALASKA
SOUTH CAROLINA
TENNESSEE
IDAHO
UTAH
WISCONSIN
MONTANA
LOUISIANA
MISSOURI
NORTH DAKOTA
OHIO
MINNESOTA
MICHIGAN
KENTUCKY
ARKANSAS
WYOMING
NEBRASKA
SOUTH DAKOTA
MISSISSIPPI
ALABAMA
OKLAHOMA
IOWA
WEST VIRGINIA
KANSAS
INDIANA
-$2,000
State
Source: Gyourko & Sinai (2003), using data from the 1990 Census
15
Metro areas with the highest
housing tax subsidy (2000 data)
Table 4: Benefits Per Owner and Per Household, Select CBSA's above median pop, 1999
Top 20 areas by per owner subsidy, 1999
CBSA Name
San Francisco-San Mateo-Redwood City, CA Metropolitan Division
San Jose-Sunnyvale-Santa Clara, CA Metropolitan Statistical Area
Bridgeport-Stamford-Norwalk, CT Metropolitan Statistical Area
Santa Barbara-Santa Maria-Goleta, CA Metropolitan Statistical Area
Suffolk County-Nassau County, NY Metropolitan Division
Oakland-Fremont-Hayward, CA Metropolitan Division
New York-Wayne-White Plains, NY-NJ Metropolitan Division
Santa Ana-Anaheim-Irvine, CA Metropolitan Division
Salinas, CA Metropolitan Statistical Area
Honolulu, HI Metropolitan Statistical Area
Santa Rosa-Petaluma, CA Metropolitan Statistical Area
Oxnard-Thousand Oaks-Ventura, CA Metropolitan Statistical Area
Cambridge-Newton-Framingham, MA Metropolitan Division
Los Angeles-Long Beach-Glendale, CA Metropolitan Division
Boulder, CO Metropolitan Statistical Area
San Diego-Carlsbad-San Marcos, CA Metropolitan Statistical Area
Bethesda-Frederick-Gaithersburg, MD Metropolitan Division
Boston-Quincy, MA Metropolitan Division
Newark-Union, NJ-PA Metropolitan Division
Lake County-Kenosha County, IL-WI Metropolitan Division
Subsidy Per Owner Occupied Unit
1999
$26,385
$24,629
$17,418
$16,759
$15,655
$15,151
$14,776
$14,593
$14,554
$14,115
$13,030
$12,895
$12,643
$12,096
$11,855
$11,641
$11,223
$10,941
$10,870
$10,700
Subsidy Per Household
1999
$13,327
$14,874
$12,075
$9,593
$12,520
$9,189
$6,123
$8,953
$7,994
$7,944
$8,338
$8,734
$7,804
$5,845
$7,719
$6,476
$7,894
$6,389
$6,823
$8,127
Source: Gyourko & Sinai (2004), using data from the 2000 Census
16
Figure 7: Value of Net Tax Benefits Per Owner-Occupied Housing Unit, by Metropolitan Area
(Proportional Financing)
$10,000
$8,000
$6,000
$4,000
$2,000
$0
-$2,000
Metropolitan Areas
Source: Gyourko & Sinai (2003), using data from the 1990 Census
17
Thoughts



Housing tax expenditure is expensive
Difficult to rein in without an offsetting policy
 Would lower house prices – they are already fragile
 Benefits are concentrated, costs are spread out
What to do?
 Implement when house prices are already growing
 Phase in changes
 Make households “whole” in terms of income to
mitigate negative effects on consumption