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Despite Benefit Disparities, Middle Class Supports Mortgage Deduction

A couple of weeks ago, David Streitfeld and Megan Thee-Brenan of The New York Times reported on the results of a Times/CBS News poll on homeownership in the United States. The poll found continued support for government subsidies for homeownership, including the mortgage interest deduction. Noting broad, bipartisan support for the deduction, Mr. Streitfeld and Ms. Thee-Brenan acknowledged that “… almost no one favors discontinuing the mortgage tax deduction, a prized middle-class benefit that has been featured on some budget-cutting proposals.”

Commentators often talk about the mortgage interest deduction as a prized middle-class benefit that enables households to achieve the American dream of homeownership. But despite their strong support for the deduction, middle-class Americans are not the primary beneficiaries of this federal tax subsidy. Instead, wealthy Americans take home a disproportionate share of the deduction’s benefits.

The deduction lowers the taxable income of American homeowners by allowing them to deduct mortgage interest from their tax bill. In 2009, according to the Joint Committee on Taxation, the mortgage interest deduction cost the federal Treasury more than $80 billion, making it not only the largest subsidy provided to homeowners, but one of the most expensive tax expenditures in the American tax code.

According to data from the Internal Revenue Service Income Bulletin and the Congressional Joint Committee on Taxation, wealthy taxpayers are substantially more likely to claim the mortgage interest deduction than low- or middle-income taxpayers. In 2009, more than 75 percent of Americans making $100,000 or more claimed the mortgage interest deduction. On the other hand, barely one-quarter of middle-class Americans in the $40,000 – $50,000 income bracket claimed the deduction. In part, low- and middle-income Americans are less likely to claim the deduction because they are less likely to be homeowners. Of those who own homes, taking the standard deduction often makes better economic sense than taking the mortgage interest deduction.

But not only do the wealthy disproportionately claim the mortgage interest deduction. They disproportionately benefit from it, as well. Twenty percent of tax filers report an income of $75,000 or more. In 2009, these tax filers reaped 60 percent of the financial benefits from the deduction. Tax filers with an income of $20,000 to $40,000, on the other hand, make up 23 percent of all returns. They pocketed less than 9 percent of the benefits of the deduction.

The graphic below highlights this disparity in the distribution of the mortgage interest deduction. For each income group, the figures in the top row show the proportion of tax filers that fall into that income group. The dollar signs show the proportion of the benefits of the mortgage interest deduction going to taxpayers in that income group. Although American tax filers overwhelmingly fall into the bottom two income groups, the benefits of the mortgage interest deduction overwhelmingly accrue to households in the top income group.

It’s not surprising that the wealthy benefit disproportionately from the mortgage interest deduction. High-income Americans are more likely than middle-class or low-income Americans to be homeowners, and the deduction rewards homeowners who take out larger mortgages to buy bigger homes. What is surprising, however, is that Americans continue to support a housing subsidy that distributes benefits so disproportionately.

The poll found that more than 90 percent of Americans support the mortgage interest deduction. (Other polls report similarly high levels of support for the deduction. A recent USA Today/Gallup poll found that 72 percent of Republicans and 59 percent of Democrats oppose efforts to eliminate the deduction, and a survey from the National Association of Home Builders found that two-thirds of Americans would be less likely to support a political candidate who favored eliminating or reforming the deduction.) But, the Times/CBS News poll also asked respondents who should benefit from home loans subsidized by the federal government. While a handful of previous polls report consistently high levels of support for the mortgage interest deduction, this is the first poll I’ve come across asking respondents about their preference for the distribution of federal homeownership subsidies.

The mortgage interest deduction benefits the set of households that Americans think are least deserving of federal homeownership subsidies. Twenty-six percent of respondents in the Times/CBS News poll prefer that low-income homebuyers benefit from federally subsidized home loans. Twenty-four percent prefer that all homebuyers reap the rewards, regardless of their income. And 15 percent believe middle-class Americans should be the beneficiaries of federal subsidies for homeownership. Although wealthy Americans disproportionately benefit from the mortgage interest deduction, only 1 percent of Americans believe high-income homebuyers should receive federally subsidized home loans.

The results of the New York Times/CBS News poll point to an important disconnect in American attitudes towards homeownership policy, especially as we continue to re-evaluate the role of the federal government in supporting homeownership. While Americans prefer that federal subsidies benefit low-income and middle-class Americans, they simultaneously (and overwhelmingly) support a policy that provides benefits disproportionately to high-income households. Although often billed as a middle-class benefit, the mortgage interest deduction primarily benefits wealthy Americans – the group of homebuyers most Americans believe least deserving of federal subsidies for homeownership.