The Costly and Ineffective Home Ownership Subsidy

February 25, 2011By Chuck Sheketoff

Did you hear about Oregon’s whopping spending increase for a subsidized housing program?

Chances are you didn’t, because this spending program — the home mortgage interest deduction — exists in the shadows of the tax code. Its results are not something legislators can brag about.

With the state confronting a large revenue shortfall, it’s high time that lawmakers begin the process of better targeting subsidies for home ownership to those who need them and stop subsidizing those who can afford million-dollar mortgages.

Related materials:

Read the OCPP Index: Home Mortgage Interest Deduction (PDF), February 4, 2011

Residing in the state tax code, the home mortgage interest deduction is a form of state spending called a “tax expenditure.” Instead of directly subsidizing housing construction or handing a check to a home buyer, the state allows home buyers to deduct their mortgage interest when calculating their taxable income, thereby lowering their housing costs.

The goal of the home mortgage interest subsidy is laudable. Home ownership can be an important component of building economic opportunity.

The problem is that the subsidy is ineffectual in promoting homeownership and costly. These flaws should spur reform any time, but especially when the state faces a $3.5 billion revenue shortfall.

As currently structured, the home mortgage interest deduction is ineffectual because it’s not targeted to assist those who most need help purchasing a home. Of all Oregon households, only about one-third benefit from the program. Only about 13 percent of taxpayers earning less than $40,000 per year claim the deduction even though that group represents more than half of all Oregon taxpayers. That’s not surprising, since relatively few low- to middle-income taxpayers itemize their deductions on tax returns.

Thus, the home mortgage interest tax deduction is of no use to those who need the most help achieving a piece of the American Dream.

Meanwhile, people who can afford million-dollar mortgages receive a taxpayer subsidy from the deduction. These fortunate Oregonians surely enjoy the subsidy, but they don’t need it.

The subsidy is also costly, and those costs can pile up quickly and unexpectedly. In 2008, the Oregon Department of Revenue expected the home mortgage interest deduction would cost the state $905 million in the current two-year budget period (2009-11). However, they recently revised the projection to $1.3 billion. And state officials say the subsidy will cost $1.6 billion for the upcoming 2011-13 budget period, almost twice as expensive as in 2007-2009.

The subsidy cries out for reform. If lawmakers were to revamp the subsidy this session, some of the tax savings could be used to avoid deep cuts to education, health care and other public services.

The subsidy’s been on the books for years and has escaped meaningful review. At the very least, the current legislature should “sunset” the program. Establishing an expiration date practically would force lawmakers to review the spending policy in the near future and consider better ways of promoting home ownership.

A review might conclude that those tax dollars should be put to better uses than helping people with million-dollar mortgages. Lawmakers may conclude that it’s better to use the resources to help first-time home buyers and those with modest means purchase homes.

The savings from a more efficient and effective home ownership subsidy program could be used to expand opportunity for Oregonians in other ways. For instance, the savings could be invested in improving education from pre-K through college, upgrading the state’s infrastructure, reducing poverty or expanding health coverage.

Oregonians cannot afford to continue subsidizing million-dollar mortgages and leaving many homeowners without assistance. Lawmakers must restructure the home mortgage interest deduction to better serve Oregonians’ spending priorities.