NO POLICY CHANGE will come of this, but it needs to be said anyway. A great inequity remains in both the House and the Senate tax reform bills, having to do with housing costs. The bills would continue to give, in the form of interest and tax deductions, enormous housing subsidies mainly to families in the middle and upper income brackets. At the same time, as a side-effect of the effort to clean up the code, both bills would reduce tax subsidies that now result in some housing construction for the poor. Meanwhile, housing subsidies for the poor on the spending side of the budget have also been greatly reduced in the last six years. The result is a terrible tilt in national housing policy. No bill explicitly giving large subsidies to the rich while none to the poor could ever pass. But implicitly, that is just what Congress is doing.
The subsidies that the bills would preserve are, of course, the mortgage interest and local property tax deductions. This year these are expected together to cost the Treasury $37.3 billion. One estimate is that more than two-thirds of this amount will go to the richest fourth of all households. The higher your tax bracket, the larger and newer your house, the larger your subsidy. The bill would also allow taxpayers to deduct interest and tax payments on second homes. The lower tax rates that reform would produce would reduce the value of these deductions, but only somewhat. The distribution across income classes would remain essentially the same.
Meanwhile, the poor would be among the unintended victims of the effort in both bills to strip away tax shelters. Almost by definition, housing projects in which some units are reserved for the poor produce less income; poor people can't afford much rent. To make such units attractive to investors, sponsors have thus set them up to generate excess tax deductions, paper losses. The investor gets from the government what he fails to get from the tenants. The Senate bill particularly would deny resort to paper losses; the bills would also reduce the value of such losses by lowering rates and would come at the present subsidies in other ways.
This is good tax policy, the more so because many experts feel that tax subsidies are an inefficient way to encourage low-cost housing construction, that it is better done directly, through the spending process. But the good tax policy has bad housing consequences, particularly because the spending programs have been so sharply cut back. In the 1970s and early 1980s, these rose mightily in cost. The administration has moved to stabilize them, so that relatively few new subsidized units are now added each year. The poor are left with . . . not very much.
There's an easy way to make things right. Limit the mortgage interest and property tax deductions as people move up the income scale, and use the proceeds to provide more housing for the poor, perhaps through vouchers. And will they ever do it? We all know the answer to that.