Mortgage deductions: a mansion subsidy for the rich?


THE REPUBLICAN flat-tax crew is hot on the trail of Fannie Mae and Freddie Mac -- the two congressionally chartered private corporations which insure home mortgages -- for sponsoring more than $100,000 worth of campaign-season ads for the mortgage-interest deduction in Iowa and New Hampshire.

It's a delicious fight, good for the country. The flat-tax debate is finally surfacing in serious form. The long-suppressed public issue is whether the home mortgage-interest deduction, the oldest of sacred tax cows, is really good for homeownership, good for the economy and fair to anyone but the rich.

The television ads by the big home financiers and their allies, the National Association of Realtors and National Association of Home Builders, didn't finger Steve Forbes or other GOP flat-tax advocates by name.

Termites and tornadoes

But they were written to spread fear that the flat tax pushed by Mr. Forbes and House Majority Leader Dick Armey -- proposals that specifically end the write-off of mortgage-interest costs -- would drive down the value of Americans' homes. One ad identified abolishing the deduction with termites and tornadoes, labeling all three "famous American home wreckers."

Rep. Bob Franks, R-N.J., Mr. Forbes' congressman, wrote Fannie Mae president James Johnson protesting the ads. Stephen Moore of the Cato Institute criticized "a government-sponsored enterprise with a direct pipeline to the federal Treasury [engaging] in lobbying activities to influence the political debate or election results."

But you have to ask -- regardless of propriety, why is this "Coalition to Preserve Homeownership," Fannie Mae, Freddie Mac, the Realtors and home builders all in one boat, taking such a rigid line on the home-mortgage deduction?

Do they really believe its demise would depress home prices, rob homeowners of equity, maybe even trigger bank failures and -- as the home builders' chief economist last year warned -- "a serious economic recession?"

Opponents say the deduction hurts the economy by channeling extra cash into the already swollen real-estate sector, at the price of investment in more dynamic, job-generating business ventures.

Repeal the deduction, they say, and the freed-up capital and likely dips in interest rates would stimulate the overall economy and offset most if not all losses in house values.

And if a tax deduction is so great for homeownership, they ask, how come Canada has about the same homeownership rate as we do -- without any deduction?

But the most critical issue waiting for big-scale public attention -- the kind a presidential campaign ought to address -- is basic fairness to all Americans. It's whether the deduction -- which now saps the Treasury of well over $50 billion a year -- is really increasing homeownership at all.

First, look who gets it. Peter Dreier, a leading urbanologist at Occidental College in Los Angeles, calculated the data from Congress' Joint Committee on Taxation. In 1994, 27.2 million returns claimed the deduction; 8.1 million of them came from families earning less than $50,000, 19.1 million from those earning over $50,000. The under-$50,000 income group's total benefit was $6.1 billion, while people earning over $50,000 benefited seven times as much -- by $45 billion.

The break goes to the rich

Only half of homeowners -- and relatively few in the lower- and middle-income brackets (and of course no renters) -- itemize their deductions anyway. But of those who did in 1994, earning $30,000 or less, the mortgage deductions were mostly under $500. By contrast, 71 percent of people earning over $200,000 claimed the deduction, at an average value to themselves of $8,350.

Instead of mortgage-interest deduction, this tax break ought to be labeled for what it is -- a mansion subsidy for the rich.

If a flat tax is a good idea, it would be preposterous to save the mortgage deduction.

And if a flat tax isn't a good idea, then Mr. Dreier has a proposal worth airing. Take the $50-plus billion hit the Treasury is now experiencing for the mortgage deduction, he says, and turn it into a straight tax credit for homeownership. Except that this tax credit would be progressive, with highest benefits for the poor who can least afford their own homes now, the next most for middle-class people, and the least benefits for the rich.

That kind of formula could actually expand homeownership -- a continuing, valid national goal, for low- and moderate-income folk, indeed for the striving younger children of the affluent too.

Mr. Dreier likes to quote an October 1969 speech by the late Housing and Urban Development secretary and one-time Republican presidential aspirant, George Romney. At the dedication of a new building for Fannie Mae, Romney tossed aside his prepared speech and proposed repealing the part of the homeowner deduction that goes to "middle-income and affluent families," and channeling the revenue instead "to meet the problems of the slums."

While the affluent rather mindlessly accept their federal housing subsidy, said Romney, "the plight of the poor is getting worse every day."

How refreshing it would be if any of today's presidential candidates could match George Romney's heart -- and common sense.

Neal R. Peirce writes a column on state and urban affairs.

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