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4 flaws of the Oregon mortgage interest deduction . . . and 1 simple fix

Commentary
April 14, 2021By Daniel Hauser

Pop quiz: What is Oregon’s biggest housing subsidy?

Many would likely not know the right answer: the mortgage interest deduction. This tax deduction delivers a tax break for people with mortgage interest on a home. Unfortunately, the mortgage interest deduction is terrible public policy. It is badly in need of reform.

Here are four reasons why the mortgage interest deduction fails to address the needs of Oregonians and one common-sense way to reform it.

Flaw #1: It’s very costly

The mortgage interest deduction is expected to cost the state of Oregon more than $1 billion in the next budget period, a sum towering over any other housing investments from the state. Rather than direct these resources into important needs like preventing evictions, helping communities devastated by wildfires rebuild, or assisting in Oregon’s recovery from the COVID pandemic, these dollars flow out to whomever happens to pay interest on a home mortgage and itemize their taxes. The cost is immense. The opportunity to do better is clear.

Flaw #2: It mainly helps the well-off, not those in need

The richest one-in-five Oregonians (with income above $100,000) capture about 60 percent of the mortgage interest deduction tax benefits. Many of these taxpayers are more than capable of buying their own home without a state subsidy. However, Oregonians making less than $33,000, the lowest-earning two-in-five, together receive less than 4 percent of the mortgage interest deduction benefits. That most of the benefits flow to the top is no accident; it’s baked into this tax deduction. High-income Oregonians are more likely to own a home, a prerequisite for this tax benefit. They are more likely to itemize deductions on their taxes. And they are more likely to face higher tax rates, making the tax deduction more valuable to them.

Not only that, but the mortgage interest deduction can also be used on a second mortgage for a vacation home. That’s right – Oregon taxpayers are subsidizing not one but two homes for many of Oregon’s richest residents.

Flaw #3: It worsens housing disparities by race

Oregonians of color have faced generations of discriminatory policies that have excluded them from opportunities to own a home — opportunities granted only to white Americans. The mortgage interest deduction perpetuates this legacy of inequality through two mechanisms. First, Black, Latinx, and Indigenous Oregonians are less likely to own a home and therefore are less likely to benefit from the deduction. Second, Oregonians of color are more likely to have lower incomes. By privileging white and better-off Oregonians, the mortgage interest deduction entrenches the wide gap in homeownership by race.

Flaw #4: It fails to increase homeownership

Research shows the mortgage interest deduction does not increase rates of homeownership. When comparing between states or countries that do and do not have this subsidy, there is no significant difference in rates of homeownership. Despite this expensive subsidy, Oregon ranks below the national average in homeownership, and even below 12 states that do not have a state mortgage interest deduction. Economists and analysts across the political spectrum agree that the mortgage interest deduction is poorly designed public policy. This makes sense, given that this subsidy mainly helps those who can already afford to own a home.

The fix: Eliminate the excesses and reinvest the savings in affordable housing.

Senate Bill 852 enacts a common-sense reform of this costly, poorly-targeted, inequitable, and ineffective housing subsidy. It phases out the mortgage interest deduction for the richest 5 percent of homeowners and ends it for vacation homes. This saves nearly $200 million in a single budget period. The bill invests these savings in homeownership opportunities and homelessness prevention.

The fix proposed by SB 852 would be a true win for Oregonians.