If you take out a mortgage to buy a house, the federal tax code lets you deduct your interest payments from your taxable income. People can also deduct state and local property taxes from their federal income taxes.
Both of these tax deductions tend to be larger for rich people, who tend to have more expensive houses. And rich people are also in higher tax brackets, making every dollar deducted worth more. As a result, these tax breaks provide the biggest financial benefit to the wealthiest taxpayers. The Urban Institute's John McGinty, Benjamin Chartoff, and Pamela Blumenthal have created a helpful chart showing just how big these tax breaks get.
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The blue bars show the value of these tax breaks for different income brackets. They can be compared with subsidies the federal government provides to low-income people to help them afford housing — represented by the yellow bar. As you can see, the tax breaks provided to the richest Americans, on a per-person basis, dwarf the value of housing subsidies provided to those with low incomes.
But the combined effect of these policies is to hurt the middle class the most. Most households in the middle of the income distribution are too wealthy to qualify for federal housing subsidies. At the same time, they tend to have relatively small houses and be in low tax brackets, so they don't get much benefit from housing-related tax breaks.
If policymakers wanted to make housing tax breaks more progressive, they could make them work more like the student loan interest deduction. The deduction is capped at $2,500, and is phased out altogether for high earners.
