An expensive tax break intended to make more Americans homeowners is instead making American homes bigger without benefiting non-rich people, according to new economic research.
The government loses out on about $100 billion each year through the mortgage interest tax deduction. That’s enough money to finance universal preschool for every American child for the next decade. The mortgage tax break is intended to help more people buy homes, which in turn would provide the kind of durable wealth and economic security that is key to upward mobility, according to the classic vision of the American Dream. There’s good reason to be skeptical of that idea, but if the tax expenditure were actually buying a big jump in homeownership then it would be difficult to say that it wasn’t achieving its goal.
But instead of helping poorer people become homeowners, the tax break helps rich people buy bigger houses, economists at R Street Institute say. “The study estimates that tax preferences, particularly the mortgage-interest deduction, have helped drive up the size of houses by as much as 18% in the nation’s most affluent areas while not broadly encouraging people to buy homes,” the Wall Street Journal notes. The average house sold today has more than 2,500 square feet of space. That’s 750 square feet larger than the average size of a house bought in 1980 and 400 square feet larger than the average home sold in 1990, according to the researchers. Larger homes are more expensive homes, so by inflating the size of houses on the market, the mortgage interest deduction is likely pushing up the price of homeownership for everyone. That’s good for real estate agents, but not for middle- and low-income families.
Layering this new finding on top of the existing economist criticisms of the mortgage interest deduction makes it hard to justify spending so much money on it. As the Center for American Progress wrote in 2011, the deduction doesn’t do a good job of targeting “the so-called marginal homebuyer, for whom a tax subsidy could mean the difference between being able or unable to afford a home purchase.” The break gives ten times as large a reward to families with incomes over a quarter-million dollars as it does to those earning between $40,000 and $75,000 per year, and “several studies have found a lack of evidence that the deduction increases overall homeownership rates.” The new research confirms that rich people derive far more value from the deduction and use it far more frequently than do households earning less than $100,000 per year.
This evidence should give new ammunition to lawmakers who have proposed curtailing the deduction in the past. President Obama has suggested capping eligibility for the deduction at $200,000 in annual income for a single person or $250,000 for a married couple, and Rep. Dave Camp (R-CA) has suggested only offering the deduction for mortgages of $500,000 or less. Those reforms would substantially reduce the cost of the deduction and at least marginally improve the current imbalance in who benefits from this taxpayer subsidy on buying a house.