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America’s biggest housing program is run by the IRS, and it’s a huge giveaway to rich people

This photo is meant to represent a mortgage subsidy.
This photo is meant to represent a mortgage subsidy.
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The mortgage interest tax deduction is a garbage policy.

It's hugely regressive: 52 percent of the benefit goes to the richest 10 percent of Americans, and only 0.1 percent of the benefit goes to the poorest 20 percent. The deduction is supposed to encourage homeownership, but economists Edward Glaeser and Jesse Shapiro have found that it overwhelmingly goes to rich people who'd own homes anyway, so there's "almost no effect" on the number of people owning. It does, however, make people buy bigger houses, which is bad for carbon emissions, encourages low-density, sprawling housing construction, and discourages living in cities. As if that weren't enough, it gives housing an edge over alternative investments, which prevents investment in more productive areas. And its cost dwarfs spending on housing programs actually meant to help the poor.

But the mortgage interest deduction is also hugely popular with people in the top 40 percent or so of the income distribution, and those people have an outsize voice in our democracy. So outright repeal seems like a pipe dream. But a new report from the Tax Policy Center confirms that even milder policies could do a lot of good. Chenxi Lu, Joseph Rosenberg, and Eric Toder consider three options:

  1. Only make interest on the first $500,000 of a mortgage deductible (currently the cap is $1 million)
  2. Turn the deduction into a nonrefundable 15 percent credit, which even people not itemizing their taxes can claim
  3. Doing both 1 and 2

They then evaluate how the changes would affect taxpayers across the income scale:

Unsurprisingly, the changes are all progressive: They involve significant tax hikes for the rich. But the credit option has the bonus of actually being a small tax cut for some low- and middle-income families. That's because bringing the credit out of the itemization process means that millions of families taking the standard deduction can now benefit. It also means that families in the 10 percent tax bracket will get a bigger break than they would've before.

Just converting to a credit and not adding a cap, Lu et al. write, means "the number of tax units who benefit would rise by 14.6 million, to a total of 48.4 million— approximately 28 percent of all tax units. The number of tax units with incomes less than $50,000 who benefit would more than double from 2.4 million to 5.1 million."

These policies would also raise a fair bit of revenue. Over 10 years, the cap would raise $94.9 billion, the credit would raise $156.1 billion, and both combined would raise $212.9 billion. That's money that could go to any number of better uses, but in particular could be used to bolster America's housing safety net.

The National Low Income Housing Coalition (which funded the Tax Policy Center report) proposes using mortgage interest deduction reform to fund the National Housing Trust Fund, an entity established amid the economic crisis in the summer of 2008 that spends at least 90 percent of its funds on building or operating affordable rental housing, and is by law targeted at "extremely low-income households," which must get at least 75 percent of the money.

That trade — raise taxes on rich people's housing, spend a lot more giving the extremely poor homes — would do a lot to redirect America's housing subsidies to where they're needed most.