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The busy season for home buying is beginning, which means many potential homeowners are calculating what buying a house would mean for their finances, including the impact of the mortgage interest tax deduction. They’re also considering whether to sign up for the biggest housing subsidy that the federal government offers.

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In a 2011 paper for National Tax Journal, Treasury Department analysts Adam J. Cole, Geoffrey Gee, and Nicholas Turner looked at just how significant the subsidy is and what the effects of repealing or altering it would be.

The cost of the deduction for the federal budget in 2012 was estimated at $98.6 billion, more than twice the amount spent on the Department of Housing and Urban Development.

Who gets that money? Cole, Gee, and Turner write that 29 percent of the 143 million tax returns filed in 2007 took advantage of the deduction. Higher income taxpayers were most likely to use the deduction and, if they did, they generally received more benefit from it.

That’s because rich people are more likely to buy houses—particularly expensive houses with large mortgages—and they’re also more likely to itemize deductions on their tax returns.

In fact, taxpayers in the top 10 percent of adjusted gross income got about 56 percent of the total value of the deduction. The top 5 percent got more than a third of it.

What does the country get for its money here? The point of the deduction is to encourage homeownership, which a lot of people see as a good thing for building community ties and commitments. But the study’s authors write that the deduction doesn’t do a great job at this task since the high earners that it mostly benefits would probably buy houses anyway, and also because the deduction may increase home prices, making it harder for people to afford to buy.

Cole, Gee, and Turner offer a few possible ways tax policy around housing could be more fair, including reducing the size of the deduction high-income taxpayers could claim, transforming the deduction into a credit so that even people who don’t itemize deductions could take advantage of it, or eliminating it entirely. They estimate that a full repeal could have put an extra $1.1 trillion in the federal coffers between 2012 and 2021.

Politically, it seems unlikely that kind of change would happen. But as debates continue over other social programs, from food stamps to social security, it’s worth keeping in mind how much money we’re pumping into this one.



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National Tax Journal, Vol. 64, No. 4 (December, 2011), pp. 977-1000
National Tax Association