President Donald Trump and the Republican Party, which controls both houses of Congress, are pushing their agenda of massive tax cuts for the wealthy. This comes at a time when most Americans are living in or near poverty and housing is increasingly expensive. One regressive policy that is being revisited is the mortgage interest deduction (MID). The MID is a tax benefit that benefits rich, predominantly white, households and does not benefit lower-income, rent-burdened households.
On November 2, House Republicans revealed their tax reform proposal, which includes capping the MID to new mortgages of $500,000 or less. Currently, Americans can deduct interest on mortgages of up to $1 million. By itself, capping MID is a good idea and something long overdue. The MID in its current form mainly benefits rich homeowners. However, this cap comes with Republicans’ overall agenda to cut taxes for the rich, such as lowering the corporate tax rate from 35 percent to 20 percent, cutting business taxes and eliminating the estate tax. The savings of capping the MID will be used to pay for tax cuts for the rich rather than pay for progressive programs like housing vouchers and affordable housing.
As the rich receive housing-related tax cuts, housing costs for most Americans are on the rise. According to Zumper's October 2017 National Rent Report, median rent for a one-bedroom apartment in San Francisco is $3,480 a month, making it the nation's most expensive city. New York City is the second-most expensive, with a median rent for a one-bedroom coming in at $2,800. Washington, DC, the nation's capital, has a median rent of $2,260 for a one-bedroom, while Boston's is $2,200.
Most Federal Housing Assistance Goes to the Wealthy
Particularly since housing is so expensive, the issue of federal assistance is increasingly relevant. However, the federal government spends more money on the mortgage interest deduction, which overwhelmingly benefits wealthy families, than it does on Section 8 housing. A recent study released by the apartment search engine Apartment List found that in 2015, "the MID cost the federal government $71 billion, more than double the $29.9 billion funding for Section 8."
Section 8 is a housing voucher program for low-income families. Families on Section 8 lease a housing unit in the private market and pay part of their income for rent, while Section 8 covers the rest. While Section 8 is a direct subsidy, the MID is a tax deduction that effectively functions as a subsidy or federal expenditure (since the government loses money via the tax write-off).
Mortgage interest deduction is a regressive tax policy, with most of the benefits going to rich households. Ostensibly, the mortgage interest deduction is supposed to encourage homeownership. However, it does the opposite. The MID does not help prospective homeowners purchase a home. In reality, it is a tax cut for rich homeowners, who would likely own a home regardless of whether the MID was in effect. As a joint report by Brandeis University's Institute on Assets and Social Policy (IASP) and the National Low Income Housing Coalition (NLIHC) points out, the MID "does nothing to help prospective homeowners acquire a down-payment, but instead, provides a tax benefit only to existing homeowners with a mortgage who itemize their deductions."
Of the $71 billion spent on MID in 2015, $60.6 billion went to high-income households, while low-income households received $4.2 billion through MID and $29.9 billion from Section 8. This means "85 percent of MID benefits go to high-income households, despite the fact that such households are significantly less likely to be burdened by their housing costs," according to Apartment List.
While low-income households are the most cost-burdened, they are not getting the assistance they actually need. Of all cost-burdened households (those spending more than 30 percent of income on housing), 74.4 percent are low-income and 12.5 percent are high-income. However, low-income households only receive 33.8 percent of the total share of federal housing expenditure, while high-income families receive 60.1 percent. This is thanks, in large part, to the MID. As for what that looks like for each household each year, Apartment List explains, "Because only a small fraction of low-income households benefit from Section 8 or the MID, average [federal housing] spending for all low-income households is just $416. Meanwhile, the average MID benefit for all high-income households is nearly four times that amount, at $1,549." Chris Salviati, one of the Apartment List report's authors, told Truthout, "We're doing a really bad job of targeting these funds to people who need it."
Apartment List attributes this inequity to a number of factors. High-income households usually buy more expensive homes and can afford second homes, giving them "a greater amount of mortgage interest to deduct." On top of that, "households that earn more have a higher marginal tax rate and, therefore, receive a greater benefit from the deduction. Finally, middle-income and low-income households are more likely to take the standard deduction rather than itemizing their tax returns, in which case they see no benefit from the MID." To qualify for MID, you need enough deductions to itemize -- such as higher home mortgage interest payments, charitable giving, and higher state and local tax deductions -- to rise above standard deduction rates. Higher-income households are more likely to have enough deductions to qualify for MID, while middle and lower-income households often do not. As a result, middle-income and low-income households are more likely to go for the standard deduction instead of an itemized deduction.
The MID also reinforces racial inequality. White households benefit far more from the MID than Black and Latino households "relative to their proportion of the population," according to the Brandeis/NLIHC report. "While whites are 67 percent of households," it says, "they gain about 78 percent of benefits from the MID." On the other hand, "while representing about 13 percent of households, blacks and Latinos are estimated to enjoy just 6 and 7 percent of the total MID benefits provided by the federal government."
This is because higher incomes and homeownership are necessary to qualify for the MID, and whites have higher incomes and homeownership rates than Blacks and Latinos. As census data shows, in the second quarter of 2017, the homeownership rate for whites was 72.2 percent, while it was 42.3 percent for Blacks and 45.5 percent for Latinos. Moreover, in 2016, median income for white families (regardless of homeownership) was $61,200, but for Blacks and Latinos, it was $35,400 and $38,500, respectively, according to the Federal Reserve's 2016 Survey of Consumer Finances.
Since a home is an important asset for many people, and homeownership is a key factor in building wealth for individuals and communities, the way the MID is currently structured reinforces the existing wealth gap between whites and non-whites. According to the Federal Reserve's survey, in 2016, white families had a median net worth of $171,000, while Black and Latino families, respectively, had a median net worth of $17,600 and $20,700. Average housing wealth (value of the home minus any debts on the home) for white families is $215,800, while, for Black and Latino families, it's $94,400 and $129,800, respectively. This means white families hold more home equity than Black and Latino families but, according to the Federal Reserve, "housing accounts for only 32 percent of their [white families'] total assets, compared with 37 to 39 percent for black and Hispanic homeowners." Additionally, 9 percent of white families had zero or negative net worth, while 19 percent of Black families and 13 percent of Latino families had zero or negative wealth.
As we examine the ties between wealth, homeownership and marginalization, it's important to recognize that the fight for affordable housing is inextricably linked with the fight for a living wage. As Tenants Together Executive Director Dean Preston said about California's housing crisis, "...in cities across the state, folks are seeing rent increases that are exponentially outpacing their income growth," a trend seen throughout the country. It's incredibly difficult to afford decent housing without a living wage. Moreover, the national trend of rising rents comes at a time when most Americans are living at or near poverty and the middle class has been decimated. Most American workers earn less than $50,000 a year, while half make less than $30,000 a year. According to Social Security Administration data, in 2016, 50 percent of American wage earners "had net compensation less than or equal to the median wage, which is estimated to be $30,557.71." Meanwhile, two-thirds, or 67.3 percent, of wage earners made "less than or equal to the $46,662.59" that same year.
Is Progressive Housing Reform on the Horizon?
Many housing experts are pushing for reforms to the MID so that lower and middle-income families can benefit.
"I strongly believe that reforming the MID needs to be accompanied by expanded funding for renters and affordable housing," said Carolina Reid, assistant professor in the Department of City and Regional Planning at UC Berkeley and faculty research advisor at UC Berkeley's Terner Center for Housing Innovation. "Instead, the current proposal cuts the corporate tax rate, which will influence the value of Low Income Housing Tax Credits (LIHTC). In addition, the proposal from Ways And Means Committee repeals private activity bonds, including multifamily tax-exempt bonds, which finance about 40 percent of all LIHTC affordable homes annually. This would devastate an important source of financing for affordable housing in California, right when we need it most."
Capping the MID would be even more effective when combined with other progressive housing policies.
One reform is a renter tax credit for low-income renters. Proposed by UC Berkeley's Terner Center for Housing Innovation, the Federal Assistance in Rental (FAIR) Tax Credit would provide tax relief for cost-burdened low-income renter families. It functions similarly to the Earned Income Tax Credit for low-income taxpayers. Reid explained to Truthout that a family that receives the tax credit would "get a payment back either on your tax burden, or if it's a refundable credit, then you can actually get money back in your pocket."
The idea behind the FAIR tax credit, according to Reid, is that "renters similarly get a benefit in relation to how much they're paying in rent to help subsidize the cost of living in that unit, and that would protect lower-income households from eviction. It would help to put money in people's pockets that they could then spend on other important things for their families, including food, but also education."
There are three structuring options within the FAIR tax credit. The Rent Affordability option provides "a credit to all cost-burdened low-income renter families," according to the Terner Center. It would cost the federal government nearly $76 billion and could potentially end homelessness. The Rent Reduction option is a more modest tax credit to low-income families, and would cost $41 billion. The Composite option augments the Rent Reduction option "with a targeted credit that provides deeper, and possibly more frequent, assistance to extremely low-income renters," costing $43 billion.
Apartment List argues for similar reforms, such as converting the MID to a tax credit so that low- and middle-income homeowners can take advantage of it and "Lowering the maximum amount of mortgage eligible for tax benefits, which would reduce the benefit to high-income households." Additionally, they argue that the "money saved by reforming the MID should then be reinvested in additional funding for programs that assist low-income renters," such as Section 8, public housing, the National Housing Trust Fund and "a proposed renter tax credit."
Given the far-right makeup of all three branches of government, the possibility of passing progressive housing legislation at the federal level seems unlikely in the near future. But there are other ways to implement policies like a renter's tax credit. "I think there's an opportunity to do a pilot [tax credit] at the state level," said Reid.
Since state governments collect taxes, they could implement a statewide renter's tax credit. For example, California could create its own pilot renter's tax credit modeled on the Terner Center's proposal. If it's successful, that could build the case for pushing it on the federal level, in addition to other progressive housing policies. But that depends on the future make-up of Congress, which is currently uncertain. While Trump and congressional Republicans push for extreme tax cuts for the rich, advocates are pushing for progressive housing reforms like rent control, renter tax credit and community land trusts.