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Federal Tax Code Favors Homeowners
WASHINGTON--How big are the annual tax benefits Congress bestows on Americans who own their homes rather than rent? And who, among homeowners, receives the bulk of those tax benefits?
A new congressional tax study reveals the pro-ownership tilt in the federal tax code--a tilt that has helped keep the housing market humming, even while the rest of the economy slipped into recession.
The report on "tax expenditures" by the bipartisan Joint Committee on Taxation estimates that in fiscal 2002, America's homeowners will divvy up $66.5 billion worth of deductions for mortgage interest payments, and $21.4 billion for local property tax write-offs. They will pocket nearly $14 billion tax-free on home-sale profits. In all, homeowners will split about $102 billion in direct federal largess. Renters, meanwhile, will receive zero in direct federal tax subsidies.
Federal budget experts view "tax expenditures"--preferences inserted into the tax code to encourage specific behaviors or investments--as the functional equivalent of appropriations for regular federal outlays.
The net effect is the same: A federal policy priority--in this case, homeownership--is promoted through non-collection of taxes that would otherwise be part of federal budget revenues.
The pro-ownership preferences are among the largest in the federal budget. The report documents that the vast majority of the homeownership subsidies go to people with the highest incomes.
During fiscal 2001, according to the tax committee, among all home-owning households that itemized deductions on their tax returns, those with incomes of $50,000 or under received less than 6% of the $64.5 billion in mortgage interest deduction subsidies.
Households with incomes between $50,000 and $75,000 took double that--about 12.2% of the benefits.
Households with incomes of $75,000 to $100,000 took another 18.9%, while taxpayers with household incomes above $100,000 received by far the heftiest share: 62.7% of all benefits available to homeowners who itemized their deductions.
Overall, home-owning households with incomes of $50,000 or above got about 94% of the $64.5 billion in mortgage interest deduction subsidies distributed by the federal tax system last year. That's not a complete surprise: Households with lower incomes are also more likely to take the standard deduction, rather than itemize deductions.
The pattern is similar with property tax write-offs.
Homeowners with incomes above $50,000 took more than four-fifths of the tax expenditure subsidies. The committee didn't do a separate distribution analysis for home-sale capital gains exclusions, but the results are likely to be the same.
People with higher-cost homes, supported by higher incomes, are far more likely to be able to take maximum advantage of the generous $250,000 (single owners) and $500,000 (married joint filers) tax-free limits on home-sale profits provided by the tax code.
What impacts do the subsidies appear to have on the economy?
They are huge. Federal tax preferences have helped sustain demand for new and resale homes this past year, despite the slowdowns elsewhere in the economy.
New home construction boomed throughout the recession of 2001, as did home resales and new mortgage originations.
Tax subsidies lower the effective cost of owning a house--at least for people who itemize--and they turn capital gains from home-sale profits into tax-free investment returns for all owners. No other capital asset in the American economy receives such kid-gloves, tax-exempt treatment.
The tax preferences also indirectly push up housing values as waves of successive buyers reinvest tax-free cash from prior sales into new, more costly home purchases. Rising housing values, in turn, helped transform "cash-out" refinances last year into one of the most explosive forces in the economy.
That, in turn, helped moderate what otherwise might have been a far deeper recession into what now appears to be one of the shortest in modern history.
Ken Harney's e-mail address is email@example.com.
Distributed by Washington Post Writers Group.