Revisiting Tax Policy

By Birbaum, Joseph | Mortgage Banking, November 2000 | Go to article overview

Revisiting Tax Policy

Birbaum, Joseph, Mortgage Banking

Low-income renters could use some new, targeted assistance to bridge the gap between being able to own and falling far short of that goal. Legislation to create a new tax credit may be the ticket to homeownership when the next Congress convenes.


Given the rising rate of homeownership, it would seem the answer is "no." Ask the hard-working breadwinner of a low-income family renting in just about any city across the country, however, and you are likely to get a different answer.

The national homeownership rate hit a record 67.2 percent on June 30. This means that 70 million of the nation's 103 million households own homes--a gain of roughly 8.9 million owner households in just seven years.

Despite this economically driven surge in homeownership, there remains a huge void in the nation's federal homeownership policy. Research conducted by the U.S. Census Bureau in 1999, "Who Could Afford to Buy a House in 1995?," shows that nine out of 10 renters could not afford to buy a modestly priced home.

What's missing are tax incentives designed to make first-time homeownership affordable for hard-working and credit-worthy lower-income renters who are doing what they can to make ends meet. One way to fill this void is to create a first-mortgage tax credit (FMTC) exclusively targeted to help lower-income renters afford their first home.

What would it take to persuade Congress to create a tax incentive targeting low-income renters? First, Congress must be convinced there is a need. Second, it must be presented with a program that would be efficient, effective and sustainable. Third, it would need to be convinced the program won't come back to haunt it--in other words, that it won't put taxpayers at risk or lead to high levels of foreclosures.

The homeownership tax policy void

Our nation has five primary federal tax incentives for homeownership: the mortgage interest deduction (MID), the real estate tax deduction, the capital gains tax exclusion, mortgage revenue bonds (MRBs) and mortgage credit certificates (MCCs). The largest and most well-known homeownership tax incentive is the MID, which accounts for about two-thirds of the estimated $90 billion in annual homeownership tax incentives. The MID and real estate tax deduction, however, are regressive because the benefits accrue primarily to higher-income households.

Research conducted in 1997 by Richard Green and Andrew Reschovsky as part of an analysis of the mortgage interest deduction for the National Housing Institute shows that more than 90 percent of the total benefits of the MID goes to families earning more than $40,000 annually. That's because the homeownership rate is higher among wealthier families, and wealthier families buy bigger homes with bigger loans. This adds up to more mortgage interest to deduct, making the MID most beneficial to people with the most mortgage debt.

The 104th and 105th sessions of Congress explored the idea of changing or eliminating the mortgage interest deduction. That exploration ended with the quick death of the flat-tax concept and the idea has not resurfaced. There is very little support for tinkering with the 87-year-old mortgage interest deduction, which is broadly viewed as a pro-homeownership element of the tax code.

Like the mortgage interest and real estate tax deductions, the capital gains tax exclusion doesn't fill the tax policy void, either--it is available only to step-up buyers. In 1997, Congress passed a law that exempted from federal income taxation gains of up to $500,000 realized from the sale of a primary residence. To qualify for this exemption, the homeowner must live in the home for at least two of the five years prior to the sale.

Mortgage revenue bonds, a form of private activity bonds, are the most common federal tax incentive that directly targets first-time homebuyers. …

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