Rethinking Homeowner Tax Incentives to Reflect Today’s Housing Challenges
by Martha Fedorowicz
Until the 1940s, buying a home was nearly impossible for all but the most affluent households. Following World War II, the federal government was eager to support soldiers returning from the front, so it introduced policies that opened the door to 15- and, eventually, 30-year mortgages, mortgage insurance to reduce downpayments, tax incentives for homeowners, and additional homebuying subsidies for veterans. “Returning soldiers lined up and bought new homes by the millions. In the years immediately following World War II, veterans’ mortgages accounted for over 40 percent of all home loans,” wrote Matt Desmond.
And thus evolved access to the American Dream. No longer limited to financial and business success, more Americans now had the capital to purchase a home of their own. As a result of these policies, the homeownership rate increased dramatically, peaking at 69.2 percent in 2004. It then began a steady decline just before the Great Recession. Today, the homeownership rate rests at 64.1 percent (PDF).
The advantages of homeownership
Despite a national homeownership rate of 64 percent, homeownership rates vary widely by race and ethnicity. In 2016, 41.0 percent of Black families and 45.6 percent of Hispanic families owned homes, compared with 71.3 percent of white families. What’s more, from 2001 to 2016, Black homeownership rates dropped by 4.8 percentage points, and Hispanic homeownership rates rose by only .2 percentage points.
Although many policies are designed to expand the benefits of homeownership, most actually exclude low-income households. In order to claim the mortgage interest deduction, tax filers must itemize their deductions, but in 2017, the Tax Cuts and Jobs Act doubled the standard deduction to $24,000 for couples filing jointly, effectively creating a disincentive for taxpayers to itemize. The result from this policy change has been a decrease in taxpayers claiming the mortgage interest deduction—across all income levels—with a particularly large decrease among families earning less than $100,000. Among those claiming the deduction in 2017, only .1 percent had incomes in the lowest 20 percent.
Most housing advocates and social welfare scholars believe that homeownership carries far more benefits than renting. First, owning a home is one of the best ways to build and keep wealth. In her remarks before the US House of Representatives Subcommittee on Housing, Community Development and Insurance, Alanna McCargo, vice president for housing finance policy at the Urban Institute, pointed out that in 2016, the median homeowner had a net worth of $231,042—more than 40 times the median net worth of renters, which was $5,202. These wealth disparities include home equity and nonhousing wealth, and the wealth gap between white households and households of color remains stark.
Homeowners also have the added benefit of being rooted more firmly in place. Research shows that stability has physical and mental health impacts and social benefits (PDF) that help residents feel like they belong in a community and can effect change within it. Data show that only 29 percent of people living in renter-occupied housing voted in the 2016 elections, compared with 52 percent of people living in owner-occupied housing. “This disparity in political activity is at least partly attributable to the fact that homeowners have a large financial interest in policies that could affect local property values, creating an additional incentive to vote that is not present for renters,” wrote Chris Salviati, a housing economist at Apartment List.
Shifting tax incentives to create a more equitable future
In addition to addressing policies that advantage homeowners, tax incentives could evolve to expand access to homeownership and generate benefits for renters, more than half of whom make less than $45,000 a year (PDF) and who may eventually make up 50 percent of the population by 2050.
On the homeownership side, some scholars advocate for using revenue from the reduction in the mortgage interest deduction to provide credits to first-time homebuyers or fund down payment–assistance programs. Data (PDF) from 2019 show that “downpayment assistance of just $3,500 would more than double the share of potential homebuyers with enough savings and income to buy homes from 7 percent to 17 percent.”
Numerous opportunities exist to provide benefits to renters as well, either by expanding benefits currently only available to homeowners or by providing new renter supports.
State renter tax credits. In Maine, renters can apply for the Property Tax Fairness Credit, which is equal to 15 percent of their yearly rent payments. In Michigan, there is the Homestead Property Tax Credit, which is based on a comparison between property taxes and total household resources. In New Jersey, renters have a choice between a $50 credit or claiming a deduction of 18 percent of rent paid during the year. These are only a few examples of many state renter tax credits.
Federal project-based renters’ credit. Citing the high share of income that low-income renters pay toward housing and the shortage of federal housing assistance available (either in the form of a voucher, public housing, or a federally subsidized unit), the Center on Budget and Policy Priorities (CBPP) proposed a federal project-based renters’ tax credit in 2017. According to the CBPP proposal, “A project-based renters’ credit would help poor families afford a home by providing states with credits that they would allocate to rental housing owners and developers for use in particular developments. Families living in renters’ credit units would pay no more than 30 percent of their income for rent and utilities—the accepted federal standard of affordability—and the rental unit’s owner would receive a federal tax credit in return for reducing the rent to that level.”
The path to equity
Our current tax system is skewed toward supporting high-income households. Beyond those promoting homeownership, other asset-building tax subsidies, such as employer-sponsored retirement plans and individual retirement accounts, are also overwhelmingly claimed by those in the top 40 percent of taxpayers.
As racial and ethnic wealth disparities and income inequality grows larger, our policies need to pivot to extend benefits that have been long skewed toward those at the top to those at the bottom. A shift in policy that allocates more dollars toward renters and provides assistance to first-time homebuyers could help increase equity in homeownership rates and decrease inequity between homeowners and renters, ultimately setting more Americans on the path to stability.
The How Housing Matters editorial team decided to use the terms “Hispanic” and “Latino” to refer to people of Latin American origin, in alignment with the terminology used by the authors of the study. We recognize that the term “Latinx” is more inclusive of the way this group may self-identify. How Housing Matters strives to avoid language that is exclusive and will always attempt to explain the editorial rationale behind the labeling of certain groups.
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