A crack in the foundation.

Author:England, Robert Stowe
Position:Cover Story

A national consensus that has shaped the very definition of America has been shattered. The once-common assumption across all segments of society and the political spectrum endorsing the quintessential American dream of owning one's home is under attack. Sure, the American people are as fervent as ever in their devotion to private homeownership. And, in Congress, somewhere between two-thirds and 80 percent of elected officials consider homeownership one of the most sacred of all legislative sacred cows. But, in the rarified atmosphere of public-policy debate on housing, the idea is not just increasingly suspect, it is coming under direct assault.

A redistributive tax policy appears to have gained some particularly staunch converts among housing experts in academia, in many affordable housing "research institutes" and among public housing advocates. Increasingly, in these housing policy think tanks the idea is that funding that provides housing for the poor in America should come from cutting back on the lost tax dollars that arise due to the mortgage interest deduction. The new dogma gathering momentum among some seeking major new sums to house America's poor and near-poor is that the mortgage interest deduction and other housing-related tax policies valued at $65 billion a year are an unfair subsidy to the middle class and should be capped or eliminated. "At every housing conference I attend," says one of the rare, free-market, housing-policy analysts, Carl Horowitz of the Heritage Foundation, "everyone complains constantly and bitterly about the enormous middle-class subsidy" they say is found in the federal tax code.

Many low-income housing advocates and their allies who have targeted the mortgage interest deduction are waging a battle that replays in microcosm the flawed class-warfare notions of earlier notable periods in the world's political history. But this time the idea is to take housing from the middle class and rich and give it to the poor. The stakes in this ideological battle are high. If the mortgage interest deduction is severely limited or eliminated, "it would convert America from a nation of homeowners to a nation of renters," says Norm Ture, head of the Institute of Research on Economics and Taxation. "It would be tantamount to abandoning the American dream."

Publicly, however, the tendency among many low-income housing advocates is to vent their spleen at the wealthy, not the middle class, because to do otherwise would be political suicide for their agenda. The folks at the National Housing Institute in East Orange, New Jersey, lampoon the mortgage interest deduction as a "mansion subsidy," according to the institute's director Patrick Morrissey, even though mansions typically do not carry large mortgages and thereby play no noteworthy role in the benefits received from the mortgage interest deduction. The deduction, rather, seems confined to the high end to the upwardly mobile segment of the upper middle class - those in society who have earned high incomes largely based on their own entrepreneurial talents and abilities. For those favoring the curtailment of the mortgage interest deduction to generate more funds for low-income housing, there appears to be little concern for the impact that such a cap on the deduction would have on either homeownership rates or on the personal finances of current and future homeowners - an effect that many tax economists calculate as potentially catastrophic.

According to a 1989 study prepared by John Savacool for The WEFA Group of Bala Cynwyd, Pennsylvania, a loss of the mortgage interest deduction would devastate the private housing sector and a weaken the entire American economy. Savacool estimated that if the mortgage interest deduction were eliminated, the real gross domestic product (GDP) would decline by an average of $33 billion per year over what it would otherwise be. Mortgage origination volume would fall by $60 billion per year and the number of first-time buyers would be reduced by between 3 percent and 6 percent, according to the study. This would occur even though home prices would fall and foreclosures would rise. There would be between 900,000 and 1.4 million fewer homeowners households, Savacool predicted. This would translate into 443,000 fewer homes sold per year and 100,000 less new single-family housing starts. Eliminating the deduction would also cause an average loss of 710,000 jobs per year and push the unemployment rate up by 0.5 percent, the study found.

According to tax policy experts, the devotees of using mortgage interest deduction revenues to pay for housing for the poor overestimate the tax revenues that would be available from setting limits on the deduction. These experts say such revenue predictions often widely miss the mark because the estimates typically neglect to factor in changes to behavior caused by such tax changes.


The attack on the mortgage interest deduction has intensified and grown increasingly shrill since the mid-1980s, as it has become more difficult to expand the federal budget for public housing in the face of protracted federal deficits. Indeed, the Omnibus Budget Reconciliation Act of 1990 incorporated a pay-as-you-go provision that requires all new programs for spending to identify new funding sources to cover their costs. Therefore, nearly all new spending programs will be forced to cannibalize existing programs or tax preferences to cover their costs. This idea fits nicely with the notion that it's "fair" to take tax benefits for housing from the rich and give them to the poor. In the current, election-year bidding war to cut taxes, the pay-as-you-go provision could bring even greater pressure to bear on the mortgage interest deduction.

Those seeking to restrict the mortgage interest deduction have in the last five years won two major victories in Congress, overturning 80 years of unwavering and near-universal support for the mortgage interest deduction. In 1987, Congress put a $1.1 million cap on the maximum mortgage size for which interest could be deducted. Mortgage amounts greater than that would lose interest deductibility for the portion that exceeded $1.1 million. And, in 1990, lawmakers passed a 3 percent reduction taken off the value of itemized deductions for families with adjusted gross incomes (AGIs) greater than $100,000. Only three major tax deductions remain in the code: mortgage interest, state and local taxes and charitable giving. Because the 3 percent provision works by subtracting 3 percent of itemized deductions for the amount that the taxpayer's AGI exceeds $100,000, a family earning $200,000 would lose $3,000 of deductions, and a family earning $400,000 would lose $9,000. The more the taxpayer's adjusted gross income exceeds $100,000, the greater the reduction of the itemized deductions. But, no taxpayer can lose more than 80 percent of the deductions covered by the provision and taxpayers always have the option of switching to the standard deduction, according to Richard Peach, deputy chief economist for the Mortgage Bankers Association of America (MBA). The 3 percent take on itemized deductions is known in Congress as the Pease provision, after its author and sponsor Representative Donald J. Pease (D-OH), a little-known congressman who represents a blue-collar, rust-belt community around Lorraine. Although he was not on the Senate-House budget conference committee, he managed to convince the committee to adopt it as a "back-door way to raise taxes on the rich," according to a source in Congressman Pease's office.

The effect of the Pease provision and other changes in the tax law enacted in 1990 that affect the mortgage interest deduction have led tax adviser William Baldwin to recommend in the January 20 issue of Forbes magazine that taxpayers who can afford it should pay off their mortgage because it has become a financial liability. This represents a complete reversal of Forbes' advice from a decade ago, when the American home...

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