In the debate over economic inequality, most of the discussion is about new things the federal government should do to make the distribution of our society’s resources more even: raise the minimum wage, say, or impose higher tax rates on the rich.
But what about getting Washington to stop some policies that skew after-tax income distribution upward?
Exhibit A is the tax code’s favorable treatment of residential real estate, specifically through the tax deductions for mortgage interest and property taxes. These are projected to cost the Treasury $70.3 billion and $31.7 billion in fiscal 2014, respectively, according to President Obama’s most recent budget proposal. Home-sale capital gains up to $500,000 are also tax-free; that’s expected to cost the Treasury $52.5 billion.
These housing breaks account for roughly 15 percent of the U.S. government’s $1 trillion in annual tax expenditures. In different ways, Obama and Rep. Dave Camp (R-Mich.), the chairman of the House Ways and Means Committee, have targeted these breaks in their tax reform proposals — for the simple reason that no serious attempt to raise revenue more fairly and efficiently could leave them untouched.
The vast bulk of housing tax breaks benefits upper-income Americans, as a 2013 Congressional Budget Office report showed. Some 73 percent of the mortgage-interest deduction accrues to the top 20 percent of the income distribution scale, and 30 percent of the deduction goes to the top 1 percent of earners.
What’s more, these tax breaks for homeowners do not increase homeownership, which is the public purpose they ostensibly serve. That’s because the vast majority of taxpayers don’t make enough money to itemize deductions on their federal returns in the first place.
Instead, the tax code’s main effect is to help people who already could afford a home buy a bigger one, as a team of economists led by Marquette University’s Andrew Hanson has shown in a new study for the free- market think tank R Street Institute.
Using Zip code-level Internal Revenue Service data on tax filers’ use of housing breaks, as well as local housing market data from the American Housing Survey, Hanson and his colleagues calculated that tax-code subsidies increase the average home size 11 percent to 18 percent above what it would have been without them, depending on location.
In the District and its suburbs, the average home size would have been 1,424 square feet smaller without these subsidies, the Hanson study estimates.
Hanson and his team report that the dollar benefits from housing tax breaks are distributed unevenly across the nation, reflecting differences in local home values and property taxes. In the D.C. area, the tax breaks save an average homeowner more than $9,000 per year; in metropolitan Atlanta, by contrast, the savings are only $1,628.
Within these regions, of course, high-priced suburbs and gentrified city neighborhoods benefit the most.
Another clear, if unstated, implication of Hanson’s study is that housing tax breaks disproportionately subsidize Blue America.
Along with the Washington area, the biggest winners, both in dollar terms and in terms of extra square footage, are high-home-price, high-property-tax metropolitan areas — Boston, San Francisco, Los Angeles, Seattle and New York, and especially their tonier precincts.
Each of these areas is represented in Congress by liberal Democrats; each voted by a huge margin for Barack Obama in 2012.
Each is also in the forefront of the push to ameliorate inequality, through policies such as a higher minimum wage and higher tax rates on property and income, or — in the case of Gov. Jerry Brown’s California or Mayor Bill de Blasio’s New York City — both.
Yet the more Blue Americans’ property taxes and marginal tax rates rise, the more they rely on those inequality-generating housing deductions, which makes it harder, politically, to get rid of the breaks.
Kinda circular, isn’t it? Many inhabitants of Blue America — progressive lawyers, health-care professionals, journalists and college professors — have raised their influential voices against the oil companies and Wall Street. They certainly have a point: Corporate tax breaks and the preferential treatment of capital gains are big sources of inequality in the tax code.
But if upscale progressives really want a more egalitarian America, their lifestyles will have to take a hit, too. (Incidentally, bigger houses tend to use more energy and produce more carbon emissions.) Tax subsidies for housing have enabled many a Blue American to renovate a Victorian, send a kid to riding camp or drive a hybrid SUV — and, painful though it may be to admit, to do so at the expense of everyone else.
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