Making Tax Incentives for Homeownership More Equitable and Efficient

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The U.S. government subsidizes homeownership for most households with ample means while subsidizing rent for only a fraction of those with the least means. A graph of average levels of federal subsidy in relation to the income of households would show a very odd-looking "U"-shaped curve, with the subsidies heaped at either end of the income distribution and little accruing to the substantial numbers of low- to- middle-income households.

In estimates for 2005, the government provides about $150 billion in subsidies to homeowners while paying about $50 billion to renters. The subsidies to owners take the form of such tax incentives as the mortgage interest or real estate tax deductions, while the subsidies to renters are mainly direct outlays, like Section 8 vouchers or public housing. Such massive subsidies affect consumer behavior and therefore, housing (and financial) markets, raising the prices of owner-occupied housing while saddling subsidized renters with a hefty opportunity cost should they consider owning.¹ By almost any standard, the distribution of housing benefits is inefficient and inequitable, with one consequence being a lower homeownership rate among low- and moderate-income individuals.

In this paper, we focus on several reforms that would level out this U-shaped curve and deliver ownership subsidies more equitably and efficiently to households at lower income levels. While we describe a range of options for accomplishing this goal, we specifically model several reforms that more broadly target federal housing tax incentives—such as the mortgage interest and real estate tax deductions. Some of these options have been suggested elsewhere in the research literature, yet even these options have pitfalls that we consider inadequately addressed—even if they do represent steps toward a more level distribution of housing benefits. We conclude with a number of considerations that need to be addressed in designing any comprehensive reform.

Notes from this section

1 Economic theory asserts that all or most of any subsidy to households—like the mortgage interest tax deduction—raises their take-home income, consequently raises the price they are willing to pay for a product or service, and therefore eventually raises actual prices for this product or service. In the case of renters, receiving $10,000 a year to rent for instance means they would forfeit this amount if they opted to buy a home, in addition to the costs of owning. In theory, some rental subsidies could be converted to ownership, but in practice, for the most part, it simply is not allowed. For examples, see Rosen and Rosen (1980); Reschovsky and Green (1998); Green and Vandell (1999); Collins, Belsky, and Retsinas (1999); Olsen (2001); and Carasso, Bell, Olsen, and Steuerle (forthcoming).

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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