THE BUILDING industry has been putting pressure on Congress to renew a provision in the tax code allowing municipal governments to issue tax-exempt bonds to finance home mortgages. A recent study by the General Accounting Office, however, shows that this way of subsidizing mortgages is not a good deal for hard-pressed home- buyers, local governments or the federal treasury.
The chief selling point for the mortgage revenue bond way of subsidizing low- and moderate-income home-buyers is that its costs don't show up as direct expenditures in the federal budget. Instead, they show up as revenue losses because the upper-income people who buy the bonds avoid paying taxes on the interest they receive. But the treasury ends up paying dearly for this subterfuge.
GAO estimates that each mortgage subsidized by revenue bonds in 1982 will cost the treasury the present-day equivalent of $13,300 over its life. The bonds' tax exemption means that bond buyers are willing to accept a slightly lower interest rate. But the benefit in interest savings to the homeowner is much smaller than the revenue loss to the treasury.
In fact, the government could provide the same benefit to home-buyers if it simply gave each of them a $3,400 direct subsidy to pay part of their conventional mortgage costs. GAO estimates that, instead of the $2.66 billion that mortagage bonds added to the deficit in 1981 and 1982, the net cost of a direct subsidy would have been only $680 million.
The mortgage revenue bond program is even more inefficient than these numbers would indicate. That's because GAO found that few of the home- buyers who benefited from the subsidized loans actually needed them to buy a home. Although subsidies were supposed to be directed to low- and moderate-income home-buyers, GAO found that over half the recipients had incomes above the median in their states. Although some buyers probably used the subsidy to buy a more expensive home than otherwise, the study estimated that only one-fourth of the recipients would have been unable to buy a home without the subsidy.
Putting these two factors together suggests that the government is spending 15 times more than necessary to achieve its intended effect of helping people buy homes who otherwise couldn't. That would be bad enough. But there is another unfortunate side effect. The proliferation of mortgage revenue and other private-purpose tax-exempt bonds has created competition for other state and local bonds needed to support public investments. As a result, financially troubled states and localities are having to pay interest rates almost as high as taxable bond rates in order to attract investors.
Congress ought to allow mortgage revenue bonds to die the natural death for which they are headed at the end of this year. And next time it considers providing a subsidy through the tax system, it should remember that it will pay a hefty premium in extra deficits for choosing this backdoor method.