The mortgage interest deduction (MID) has been a sacred cow of tax policy for decades and a key item in the recent tax reform negotiations. Its proponents say it makes homeownership a possibility for those who might not be able to afford it otherwise, while opponents claim it encourages over-borrowing, provides tax benefits to those who don’t need them and inflates home prices. The MID is not the only federal policy used to support housing, however, not even close.
Since the 1930’s, the federal government has played a significant role in supporting the affordability of housing. The current tax code has myriad provisions that aim to make it easier for every American to have a roof over their head. Some of those provisions, such as the MID, make it easier for middle and upper-income households to own a home (or, say, a yacht!) by reducing the after-tax cost of mortgages up to $750,000 (reduced from $1 million by the recent tax bill). Others, such as the Low Income Housing Tax Credit (LIHTC), make it possible for eligible low-income households to rent an apartment by providing tax credits to developers who build apartments to be rented at below-market rates. In all, there are approximately 160 federal programs available to provide some form of housing assistance.
Unsurprisingly, a quick examination of these programs reveals widespread overlap and duplication. With roughly $180 billion dollars in annual funding or forfeited tax revenue being used for these programs, significant sums of money could be saved by more interagency collaboration, cutting redundant programs and/or agencies, and modifying existing policy. A 2012 Government Accountability Office (GAO) report highlighted the extent of program overlap and areas for potential collaboration. For example, four different federal agencies- Housing and Urban Development (HUD), Internal Revenue Service (IRS), US Department of Agriculture (USDA), and Veterans Affairs (VA)- offer assistance for buying or financing a home across 39 different programs. Additionally, seven different agencies- HUD, IRS, Federal Home Loan Bureau (FHLB), Farm Credit System (FCS), FannieMae, FreddieMac and FarmerMac- offer programs to increase the availability of mortgages. For multifamily, there are 25 programs across four different agencies that work to assist in the production of affordable rental housing.
Admittedly, many of the programs are nuanced in their particular goals or geographic orientations- rural vs. urban, farm vs. single-family home, etc. HUD has a specific goal of preserving affordable rental housing while USDA has the broader objective of assisting rural communities. Nevertheless, there is little justification for such expansive program administration. Every agency requires additional administrators, offices and travel expenses while every program requires the same associated costs and expensive legal interpretation for the enforcement of the programs’ rules and objectives. An interagency rental policy working group was formed in 2010 in order to provide analysis and make recommendations for better coordination between HUD, IRS, and USDA regarding rental housing policy. Unfortunately, it is not clear that many of these recommendations have been implemented or had their intended cost-saving effects.
Not only is there rampant inefficiency, but it is likely that some federal policies created to expand home ownership actually inflate home values and make homeownership less accessible. Some economists believe a repeal of the MID and the deduction for state and local property taxes could increase homeownership by reducing home values. Those hoping for a full repeal will have to wait. The Tax Cut and Jobs Act just signed into the law by the President only reduces the mortgage allowance to $750,000. Despite the decrease in the allowed deduction, the majority of the MID benefits will continue to flow to higher income earners. The effects of higher home values on apartment rents also need to be considered. Some studies have shown that inflated home values lead to higher rents in the long run, increasing the pool of households needing subsidized rental assistance. If we are going to forfeit billions of dollars in tax revenue, we should be confident that these policies are not working to offset one another.
