Economy boosted by tax tilt in favor of homeownership


HOW BIG ARE the annual tax benefits Congress bestows on Americans who own their homes rather than rent? And who, among homeowners, receives the bulk of those tax goodies?

A new congressional tax study reveals the startling pro-ownership tilt in the federal tax code, a tilt that helped keep the housing market humming while the rest of the economy slipped into recession.

The report on "tax expenditures" by the bipartisan Joint Committee on Taxation estimates that in fiscal 2002, America's homeowners will divvy up $66.5 billion in deductions for mortgage interest payments and $21.4 billion for local property tax write-offs, and will pocket nearly $14 billion tax-free on home sale profits.

All in all, homeowners will split about $102 billion in direct federal largesse. Renters, meanwhile, will receive zero in direct federal tax subsidies.

The pro-ownership preferences are among the largest in the federal budget. But who actually reaps the benefits of these subsidies? Are they spread around evenly, or do they tend to favor certain homeowners over others?

The report documents that the vast majority of the homeownership subsidies go to people with the highest incomes. During fiscal 2001, according to the tax committee, among home-owning households that itemized deductions on their tax returns, those with incomes of $50,000 or less received less than 6 percent of the $64.5 billion in mortgage interest deduction subsidies. Households with incomes between $50,000 and $75,000 took double that, about 12.2 percent of the benefits.

Households with incomes of $75,000 to $100,000 took 18.9 percent, while taxpayers with household incomes exceeding $100,000 received by far the heftiest share, 62.7 percent of benefits available to homeowners who itemized their deductions.

Overall, home-owning households with incomes of $50,000 or more got about 94 percent of the $64.5 billion in mortgage interest deduction subsidies distributed by the federal tax system last year. That's not a complete surprise: Households with lower incomes are also more likely to take the standard deduction rather than itemize deductions.

The pattern is similar with property tax write-offs. Homeowners with incomes of more than $50,000 took more than four-fifths of the tax expenditure subsidies. The committee didn't do a separate distribution analysis for home-sale capital gains exclusions, but the results are likely to be the same.

When you sell your high-cost home for a profit, odds are that you're going to net higher profits in gross dollars than sellers of less-expensive homes. A 20 percent net gain on a $100,000 home gets you $20,000 in tax-free money. Sell a million-dollar house for a 20 percent profit and you pocket $200,000 tax-free.

People with higher-cost homes, supported by higher incomes, are far more likely to be able to take maximum advantage of the generous $250,000 (single owners) and $500,000 (married joint filers) tax-free limits on home sale profits provided by the tax code.

Clearly, the federal pro-homeownership tax policy wasn't designed to distribute benefits equally among taxpayer income segments. But how significant are the subsidies' effects on the economy as a whole?

They are huge. Federal tax preferences have helped sustain demand for new and resale homes in the past year despite the slowdowns elsewhere in the economy.

Housing construction boomed throughout the recession last year, as did home re-sales and new mortgage originations.

Tax subsidies lower the effective cost of owning a house - at least for people who itemize - and they turn capital gains from housing into tax-free investment returns for all owners who sell for a profit. No other capital asset in the U.S. economy receives such kid-glove, tax-exempt treatment.

The tax preferences also indirectly push up housing values as waves of successive buyers reinvest tax-free cash from prior sales into new, more costly home purchases.

The Federal Reserve estimates that as much as $80 billion was pulled from home equity holdings last year via refinancing and that $50 billion of that was converted into consumer expenditures.

That helped moderate what otherwise might have been a far deeper recession into what appears to be one of the shortest in modern history.

Does the housing tax subsidy distribution system work, even with its strong bias toward upper-income homeowners? You bet. And the entire economy reaps the rewards.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071. Or e-mail him at

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