Editor: David Reiss
Brooklyn Law School

November 13, 2017

Smarter Housing Tax Breaks

By David Reiss

Matt Rossman has posted a timely article, In Search of Smarter Homeowner Subsidies, to SSRN just as Congress debates the future of the mortgage interest deduction and other tax perks of homeownership. The abstract reads,

Critics have long assailed the federal tax code’s homeowner subsidies as lucrative tax breaks for upper income households that are essentially worthless to lower income households financially constrained from purchasing a home. This article examines the subsidies through a different lens and reveals another serious flaw that has received little attention. It demonstrates how the homeowner subsidies do very little to contain the negative housing externalities that other federal policies seek to abate and, worse yet, probably undermine these policies by subsidizing behavior that exacerbates the externalities. These policies are wide-ranging and include: (i) combating blight, deterioration and public health risks in disinvested housing markets, (ii) decreasing economic and racial housing segregation, and (iii) lessening environmental degradation that results from housing choices, while reducing the vulnerability of those who reside in environmental hotspots.

This article provides several explanations for this disconnect. Among these is an idealization of homeownership, reflected in the tax code, which sees only its positive externalities. Accordingly, the tax code subsidies reward homeowner decisions at large and without regard to the negative externalities that often follow from homeowner location and form decisions. This serves as the basis for this article’s contention that the current subsidies are not “smart.”

This article then explores whether and how the homeowner subsidies might be made smarter. Applying public finance research on the track record of more targeted, development subsidies at the state and local levels, the article identifies three conceptual legal models for smarter subsidies. It also identifies a host of accompanying challenges, many related to trying to tackle multiple housing externalities that vary across and within thousands of different localized housing markets. The article calls attention to the recent revolution in the quantity, quality and access to market, submarket and property specific real estate data, which is fueling a significant uptick in the sophistication of strategic housing planning at the community level. These advances may be the best reason to think that smarter federal homeowner subsidies are possible. This article closes by suggesting that Congress authorize HUD to pilot a program of community-specific homeowner subsidies, seeking to foster community level innovation that might later be more broadly adaptable.

The article challenges us to think of tax reform as an opportunity to do more than just move money up or down an income bracket:

The prospect of smarter homeowner subsidies is tantalizing. When considering the sheer scale of what the federal government currently invests in homeowner subsidies that inure primarily to the benefit of higher income households and are completely insensitive to negative housing externalities, it is difficult not to wonder what a more carefully considered system of allocating subsidies might yield. If done right, a powerful tool could be added to the mix of federal housing strategies. (59)

The current state of affairs in DC does not give me much hope that Congress has the stomach to think big about housing tax policy right now, but this article will provide much food for thought when it does.

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