The mortgage interest deduction was created in the hopes of making homeownership an attainable goal for as many Americans as possible. The deduction allows homeowners to deduct the interest they pay each year on their home mortgages, covering up to $1.1 million in loans between a borrower’s first and second homes, to increase both the appeal and affordability of homeownership.
Analysts long have argued that subsidizing homeownership creates a number of positive spillover effects for communities. Homeowners are often thought to take better care of their property, become more engaged in local affairs and help create healthier, safer neighborhoods. As such, it was considered to be sound policy to try to extend these advantages to those struggling to make ends meet.
However, the high hopes for the mortgage interest deduction have failed to come to fruition. A report published by the Schwartz Center for Economic Policy Analysis last year finds that the deduction “disproportionately benefits taxpayers in the top fifth of the income distribution,” a group likely to be homeowners with or with-out the deduction.
Likewise, a study published earlier this year by the Urban Institute found that the average value of the deduction rises steadily with income, from $91 for those with annual incomes of less than $40,000 to $5,459 for those making more than $250,000.
Because the total deduction available mirrors the size of the mortgage, and because it is available only to those who submit itemized returns, the deduction seems to be promoting the purchase of “upgrade homes” by current homeowners rather than increasing overall homeownership.
What these shortcomings also bring to light is the fact that homeownership may not be the be-all, end-all that it was once thought to be. While it may be the dream for some, it may not be the right situation for countless others.
As such, attention must be drawn to the vastly disproportionate aid that the federal government currently dedicates to homeowners relative to the assistance it provides to those for whom renting is the better option. As the recent housing collapse highlighted, we need a national housing policy that strikes a better balance between the homeownership and renter markets.
The Congressional Budget Office highlighted this imbalance in a 2009 report that found “the federal government devoted almost four times the amount of budgetary resources to supporting homeownership (about $230 billion) as it did to improving rental affordability ($60 billion).” At a time when key rental assistance programs such as the Housing Choice Voucher (Section 8) Program remain chronically underfunded (because of funding limitations, only one in four households eligible for vouchers receives any form of federal housing assistance), a revaluation of federal housing policy certainly is in order.
The Department of Housing and Urban Development reports that more than half of Maine’s extremely low-income population — those earning at or below 30 percent of area median income — pay more than half their earnings toward their monthly rent and often live in subpar conditions, without adequate kitchen facilities or plumbing. Likewise, a 2009 study by the MIT Center for Real Estate found that about 42,000 renter households in Maine are both low-income and paying more than 50 percent of their income toward rent. Many of these vulnerable renters live on the brink of homelessness and must make awful choices among food, shelter and health care needs.
Homeownership is still an integral part of the American dream. But the mortgage interest deduction, a stalwart in the debate, is not delivering that which we have come to believe it should. Too many of its benefits are being felt by those who are looking to buy a larger home, or a second home, and because of this, we are failing to provide targeted supports to those families on the border between renting and owning, while also ignoring the large unmet needs of those for whom renting is the best or only option.
The Urban Institute estimates that in 2012, the deduction will cost the U.S. Treasury $131 billion, while Maine Revenue Services reports that the deduction is already costing the state nearly $80 million in revenue each year in a severely cash-strapped environment.
Yet, with only a few common-sense changes, the deduction could be restructured to target new homeowners more effectively, while enabling an increase in federal rental assistance programs and still save enough to help pay down the national debt. All we need is a bit of fresh thinking and a willingness to work together to benefit all those involved. In the end, isn’t that what it’s all about?
Ben McCall, a senior at Bates College, recently completed a summer internship at the Maine Affordable Housing Coalition.