PERSPECTIVE ON TAXES : Give the Middle Class a Break : Replace the mortgage deduction, which benefits the well-off, with a tax credit to increase home ownership.

President Clinton wants to give families tax breaks to help pay college tuition, "just as we made mortgage interest tax-deductible because we want people to own homes."

The emphasis on helping middle-class families achieve the American dream of home ownership is on target. In fact, one of Clinton's most unheralded accomplishments has been a turnaround in home-ownership rates. During the Reagan and Bush years, ownership rates plummeted, especially among young families. Under Clinton, construction and sales of single-family homes have improved significantly. Some of this is due to rising incomes. But a large part is the result of the Administration's revitalization of the Federal Housing Administration as an insurer of single-family mortgages. 1994 was the FHA's best year in its 60-year history. It insured 1.3 million loans--450,000 of them for first-time buyers.

Despite this progress, the vast majority of young families are still shut out of the market. To expand middle-class home ownership, Clinton should propose a progressive refundable tax credit.

Don't we already have a tax break for homeowners? Yes, but it goes to the wrong people. The current mortgage-interest deduction is a government subsidy that goes primarily to the affluent. Those with the highest incomes and the most expensive homes (including second homes) get the largest subsidy. Almost half (44%) of last year's $51-billion homeowner subsidy went to the 5.2% of households with incomes over $100,000. And 16.5% of this subsidy goes to the 1% of taxpayers with incomes over $200,000.

Contrary to real-estate industry rhetoric and lobbying, these deductions aren't the salvation of the middle class. Only one-fifth of the 28 million households with incomes between $30,000 and $50,000 received any homeowner subsidy. Half of all homeowners do not itemize deductions at all. As a result, 71% of families with incomes above $200,000 receive a mortgage tax break (averaging $8,457), while only 2.8% of households below $30,000 get any mortgage subsidy (averaging $486).

Well, don't we have the federal Department of Housing and Urban Development to help house the poor? The $51 billion in homeowner tax breaks (which doesn't even include another $13 billion in property-tax deductions) is double the entire HUD budget of $26 billion. Less than one-third of the eligible 13.8 million low-income renter households receive federal housing assistance--the lowest level of any industrial nation.

Home ownership is a fundamental part of America's promise of prosperity. No one wants to eliminate homeowner subsidies for middle-class families. But the current system--which subsidizes the purchase of huge homes by the rich without helping most working-class families buy a small bungalow--is in desperate need of reform.

The Congressional Joint Tax Committee projects that the mortgage-interest subsidy will reach $68 billion by 1999. Some deficit hawks across the political spectrum want to put a cap on the mortgage tax break to reduce the federal debt. This reduces subsidies for the wealthy and cuts the deficit, but does nothing to expand ownership for hard-working families.

Clinton would do better to propose scrapping the homeowner deduction and trying a new approach--a progressive homeowner tax credit, similar in its mechanics to the current earned-income credit for low-wage earners, but reaching a broader income range. The amount would be tied to both household income and local housing prices. It would increase home ownership, catalyze home building, generate jobs and help stimulate economic growth.

The tax credit would be available to all families, including those moderate-income households that do not itemize their deductions. Tying the credit progressively to income would limit subsidies for the wealthy but preserve them for the middle class. It would also include a large number of families who currently do not benefit. The credit could be adjusted for regional housing costs in order to avoid penalizing home buyers in high-cost areas like California.

A tax credit is a more efficient and fair than the current approach. By turning the mortgage-interest deduction into a progressive tax credit, the same $51 billion would help a lot more families become (and remain) home owners. The wealthy would continue to purchase homes with or without a tax subsidy. Because housing demand is more elastic at the bottom and middle parts of the economy, a progressive homeowner tax credit could make the difference between renting and owning for millions of working-class families.

Moreover, by increasing the demand for homes, a progressive homeowner tax-credit system would help the housing industry (builders, brokers and mortgage lenders), create jobs and improve the nation's economy.

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