Home Sweet Home

The Tax Foundation's Tax Policy Blog had two postings that shed some light on that holiest congregation of holy tax cows, the various federal income tax breaks associated with home ownership.

One posting brings to light the "tax expenditure" cost of the three principal tax breaks associated with home ownership: the home interest deduction, the deduction for state and local property taxes, and the capital gains exclusion on home sales. According to the President's budget just summited to Congress, these three items will, over the next five years, cost $863 billion.

Another post, Vertical Equity and the Home Mortgage Interest Deduction, shows dramatically that the home interest deduction, widely perceived as the deduction for "everyman" is really quite regressive:

The most recent IRS data show few low- and middle-income taxpayers benefit from the home mortgage interest deduction. Those who filed tax returns with under $30,000 in adjusted gross income (AGI) in 2003 received just 9 percent of deductions for home mortgage interest, despite filing 52 percent of all tax returns. (The median taxpayer’s AGI was approximately $29,000 in 2003.) In contrast, 36 percent of home mortgage interest deductions were claimed by taxpayers with AGIs over $100,000.

In fact, the recent run-up in real estate prices and the proliferation of McMansions can be attributed to the home interest deduction:

Despite the claims of various industry groups that the home mortgage interest deduction is an important factor promoting broad-based home ownership, IRS data show the bulk of mortgage interest deductions are claimed by a relatively small fraction of Americans with incomes well above average. As a result, it is likely that the deduction primarily encourages larger and more expensive homes among a relatively small share of taxpayers, rather than promoting broad-based home ownership among ordinary Americans.