Flaws of the Mortgage Interest Deduction


Flaws of the Mortgage Interest Deduction


Flaws of the Mortgage Interest Deduction

Note: This invited testimony was provided at an informational meeting of the Senate Committee on Housing and Development on 3/13/2023.

Chair Jama, Vice-Chair Anderson, and members of the Committee

My name is Daniel Hauser (he/him), Deputy Director for the Oregon Center for Public Policy.

The Oregon Center for Public Policy is a think tank dedicated to improving the economic outcomes for all Oregonians, particularly low-income families and Oregonians of color, through research and analysis.

Oregon faces a severe housing crisis. More than eighteen thousand school children don’t know where they will sleep at night. Homeownership is out of reach for many families, and this crisis is not limited to urban areas. Oregon’s rural counties are some of the least affordable among all rural counties nationally. Meanwhile, Oregon’s biggest housing subsidy — the mortgage interest deduction — does little to alleviate the problem.

Oregon’s mortgage interest deduction is a very expensive housing subsidy. The deduction allows those who claim it to reduce their taxable income by the amount of interest paid on mortgage debt of up to $750,000 for new mortgages and $1 million for mortgages prior to 2018. This also includes debt on a second home. The cost of this program has previously surpassed $1 billion for a biennium and the Department of Revenue forecasts the cost to be over $900 million in the 2023 – 2025 biennium. As home prices and interest rates rise – the cost to the state will, too.

The mortgage interest deduction is inequitable, disadvantaging low- and moderate-income Oregonians. The benefits accrue to higher income taxpayers because this is an itemized tax deduction; taxpayers who use the standard deduction get no benefit, even if they pay interest on a mortgage. For the 2020 tax year, 60% of the benefit accrued to the highest-earning 20% of Oregonians. Less than 4% of the benefits flowed to the lowest-earning 40% of Oregonians. And by definition, renters — whose incomes tend to be lower than those of homeowners — receive no benefit from this housing subsidy. Landlords who rent out a house or multiple houses do not need to use this deduction, they have a separate means of deducting mortgage interest as a business expense.

Oregonians of color have faced generations of discriminatory policies that have excluded them from opportunities for homeownership and economic success. This leaves them with fewer benefits from the mortgage interest deduction, because they are less likely to own a home and are more likely to have lower incomes. We recently dove deep into the data on homeownership rates in Oregon by racial and ethnic identity as part of our Data for the People series. Our results found that African American, Afro-Caribbean, Ethiopian, Latinx Mexican, and Indigenous Mexican, Central American, and South American Oregonians had homeownership rates below 50% – some even dip below 40%. The homeownership rate for Western European Oregonians stands near 70%.

The US Treasury has done groundbreaking research on the distribution of tax benefits by racial and ethnic identity for the mortgage interest deduction. They found that white families make up 67% of national tax filers, but capture 84% of the mortgage interest deduction benefits. This adds up to $26 billion flowing to white families – and $5 billion to everyone else. For comparison, Hispanic families are 15% of tax filers, but get 7% of the benefits. Similarly, Black families are 11% of filers but get only 4%.

The deduction disproportionately flows to urban residents, leaving behind many rural Oregonians. For example, the average mortgage interest deduction benefit in Clackamas County was $331, while it was only $71 in Wheeler County. There is already significant economic inequality between urban and rural Oregon, and the mortgage interest deduction only adds to it.

Research has shown again and again that the mortgage interest deduction does not increase rates of homeownership, as the Secretary of State’s audit made clear. When comparing states or countries that do and do not have this subsidy, there is no significant improvement in homeownership. Despite this billion dollar subsidy, Oregon ranks below the national average in homeownership, and even below 12 states that do not have a state mortgage interest deduction. Economists across the political spectrum agree that the mortgage interest deduction is poorly designed public policy.

The mortgage interest deduction is costly, inequitable, and ineffective. In the face of the housing crisis afflicting our state, it is urgent that the legislature transform the state’s biggest housing subsidy into a vehicle for addressing the crisis. We urge you to reform Oregon’s mortgage interest deduction so the resources improve housing security in our communities.

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Daniel Hauser

Daniel Hauser is the Deputy Director of the Oregon Center for Public Policy

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