Who Benefits from Homeownership Tax Subsidies?

March 20th, 2017 by Lapekas Law Staff

post-img-3_360x230Setting aside special interests, there are generally two commonly-accepted reasons tax subsidies are passed: (1) to encourage asset-building behavior, especially within the middle-class (through higher education, investment, or saving); and (2) to pad the Federal Treasury through “trickle-down” economics.

Among the low and middle-classes, personal residences are usually the primary wealth-building assets. So wouldn’t encouraging home ownership through tax incentives (e.g. the mortgage-interest and real estate tax deductions) benefit the middle class the most (and thus benefit the national fisc because, when the middle class makes more, the middle class pays more)? According to a September 2014 report from the Tax Policy Center (“Who Benefits from Asset-Building Tax Subsidies?”), it turns out that the answer is, “No.” Of the $98.3 billion in federal expenditures for home ownership tax subsidies, 70% (or $69.6 billion) goes to the top 20% of taxpayers (measured by income), 8% goes to the middle 20 percent, and less than 2% goes to the bottom 40%. Moreover, there does not appear to be a net benefit to the national fisc.

So why do 80% of taxpayers share only 30% of the $98.3 billion homeownership tax subsidies? One, their home purchases are significantly smaller, and thus the deduction may not exceed the otherwise allowed standard deduction and personal exemptions; and two, due to the subsidies’ poor design, “much go toward encouraging the purchase of larger homes and the accrual of higher debt rather than increasing homeownership and home equity.”

Subsidies that incentivize retirement savings are only slightly more evenly distributed: 66% of the subsidies go to the top 20% of income earners, 33% go to the middle three quintiles, and less than 1% goes to taxpayers in the lowest 20%.

Why aren’t the low and middle-classes benefiting more? One, they either lack access to employer-based retirement savings or employer-sponsored programs are limited to employees earning higher incomes, and credits, such as the “saver’s credit” phase out when a taxpayer reaches a “moderate” income level and are non-refundable and thus do not encourage saving among individuals with no tax-liability.

And what about the subsidies’ “trickle-down” net effect on the Federal Treasury? It appears to be non-existent. In some years the expenditures for asset-building subsidies exceeded personal savings, as “much of the subsidies’ benefits go to people who shift assets from unsubsidized to subsidized savings accounts or borrow more against their assets.”

Outside of evaluating and voting for political candidates, what does the Tax Policy Center Report mean for those of us who do not make tax policy?

The Tax Policy Center’s report should cause a paradigm shift in our wealth-building plans. If you are purchasing a home for the purpose of building wealth or for annual tax savings, you need to first determine whether a tax savings would actually exist, and whether, accounting for inflation and expenses, the equity built over time would be greater than if the additional amounts attributable to owning a home were invested in other assets.