Housing Tax Expenditures and the Economy

Transcription

1 Housing Tax Expenditures and the Economy The GSEs, Housing, and the Economy January 24, 2011 Todd Sinai, The Wharton School

2 Housing tax expenditures cost a lot Tax expenditure Mortgage interest deduction Property tax deduction Capital gains tax exclusion JCT 2011 estimate $93.8 billion $22.8 billion $16.5 billion Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years , December 15, 2010, p.39.

3 Housing tax expenditures cost a lot Tax expenditure Mortgage interest deduction Property tax deduction Capital gains tax exclusion JCT 2011 estimate $93.8 billion $22.8 billion $16.5 billion Total:* $133.1 billion *The JCT does not agree with totaling tax expenditures in this way. Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years , December 15, 2010, p.39.

4 Housing tax expenditures cost a lot Tax expenditure Mortgage interest deduction Property tax deduction Capital gains tax exclusion JCT 2011 estimate $93.8 billion $22.8 billion $16.5 billion Total:* Projected 2011 deficit (CBO): Share of deficit: $133.1 billion $1,066 billion 12.5 percent *The JCT does not agree with totaling tax expenditures in this way. Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years , December 15, 2010, p.39.

5 Housing tax subsidies are even bigger Tax expenditure JCT 2011 estimate P-S 2003 estimate* Mortgage interest deduction $93.8 billion $72 billion Property tax deduction $22.8 billion $24 billion Capital gains tax exclusion $16.5 billion Untaxed return on housing equity $230 billion Total: $133.1 billion $330 billion Projected 2011 deficit (CBO): $1,066 billion Share of deficit: 12.5 percent *P-S estimates include Federal and State taxes. Source: J. Poterba and T. Sinai, Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing, 2010

6 Who benefits from the mortgage interest deduction? High benefit High-income households Younger households Low benefit Low-income households Seniors

7 Who benefits from the mortgage interest deduction? High benefit High-income households Younger households Low benefit Low-income households Seniors High marginal tax rates More debt Seniors have little mortgage debt Low-income households rarely itemize

8 Who benefits from the mortgage interest deduction? Per-Household Tax Savings From the Mortgage Interest Deduction Annual Household Income Age <40K 40-75K K K 250+ All ,801 3,468 7,711 1, ,525 3,534 6,575 1, ,034 2,095 5,741 1,194 > , All ,262 2,697 5,408 1,066 Source: 2003 data from the Survey of Consumer Finances Source: J. Poterba and T. Sinai, Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing, 2010

9 The MID reduces housing costs Lowers out-of-pocket costs for existing home owners Eliminating the MID reduces disposable income This is why tax reform proposals bundle changes to the MID with offsetting changes elsewhere in the tax code

10 The MID reduces housing costs Lowers out-of-pocket costs for existing home owners Eliminating the MID reduces disposable income This is why tax reform proposals bundle changes to the MID with offsetting changes elsewhere in the tax code but it encourages housing spending Reduces the relative cost of housing by 6 percent People spend more on subsidized things Leads to more dollars being spent on housing 3 to 6 percent more

11 The MID reduces housing costs Lowers out-of-pocket costs for existing home owners Eliminating the MID reduces disposable income This is why tax reform proposals bundle changes to the MID with offsetting changes elsewhere in the tax code but it encourages housing spending Reduces the relative cost of housing by 6 percent People spend more on subsidized things Leads to more dollars being spent on housing 3 to 6 percent more How much varies: 5% for young, low-income 20% for young, high-income 1% for older, any-income

12 The MID treats debt and equity finance of housing neutrally Current tax code subsidizes equity and debt investment in houses Eliminating the MID would discourage the use of mortgage finance Equity investment in housing would still be tax-favored Households who could replace debt with equity, would

13 High-income and older households can substitute equity for housing debt Fraction of Outstanding Deductible Mortgage Debt that Homeowners Could Replace by Drawing Down Financial Assets Annual Household Income Age <40K 40-75K K K 250+ All > All Source: 2003 data from the Survey of Consumer Finances Source: J. Poterba and T. Sinai, Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing, 2010

14 The MID supports house prices Housing subsidies increase willingness-to-pay Effect on house prices varies across the U.S. Subsidy is highest in places with high incomes and high house prices Those places experience the most capitalization into house prices California, Northeast Corridor are the big winners

15 HAWAII DIST. COLUMBIA CALIFORNIA CONNECTICUT NEW YORK MASSACHUSETTS NEW JERSEY RHODE ISLAND MARYLAND NEW HAMPSHIRE VIRGINIA WASHINGTON MAINE DELAWARE NEVADA ILLINOIS VERMONT OREGON FLORIDA NEW MEXICO ARIZONA COLORADO GEORGIA PENNSYLVANIA NORTH CAROLINA TEXAS ALASKA SOUTH CAROLINA TENNESSEE IDAHO UTAH WISCONSIN MONTANA LOUISIANA MISSOURI NORTH DAKOTA OHIO MINNESOTA MICHIGAN KENTUCKY ARKANSAS WYOMING NEBRASKA SOUTH DAKOTA MISSISSIPPI ALABAMA OKLAHOMA IOWA WEST VIRGINIA KANSAS INDIANA Distribution of housing tax subsidy $10,000 Figure 3: Value of Net Tax Benefits per Owner-Occupied Housing Unit (Proportional Financing) across states (1990 data) $8,000 $6,000 $4,000 $2,000 $0 -$2,000 State Source: Gyourko & Sinai (2003), using data from the 1990 Census 15

16 Metro areas with the highest housing tax subsidy (2000 data) Table 4: Benefits Per Owner and Per Household, Select CBSA's above median pop, 1999 Top 20 areas by per owner subsidy, 1999 Subsidy Per Owner Occupied Unit Subsidy Per Household CBSA Name San Francisco-San Mateo-Redwood City, CA Metropolitan Division $26,385 $13,327 San Jose-Sunnyvale-Santa Clara, CA Metropolitan Statistical Area $24,629 $14,874 Bridgeport-Stamford-Norwalk, CT Metropolitan Statistical Area $17,418 $12,075 Santa Barbara-Santa Maria-Goleta, CA Metropolitan Statistical Area $16,759 $9,593 Suffolk County-Nassau County, NY Metropolitan Division $15,655 $12,520 Oakland-Fremont-Hayward, CA Metropolitan Division $15,151 $9,189 New York-Wayne-White Plains, NY-NJ Metropolitan Division $14,776 $6,123 Santa Ana-Anaheim-Irvine, CA Metropolitan Division $14,593 $8,953 Salinas, CA Metropolitan Statistical Area $14,554 $7,994 Honolulu, HI Metropolitan Statistical Area $14,115 $7,944 Santa Rosa-Petaluma, CA Metropolitan Statistical Area $13,030 $8,338 Oxnard-Thousand Oaks-Ventura, CA Metropolitan Statistical Area $12,895 $8,734 Cambridge-Newton-Framingham, MA Metropolitan Division $12,643 $7,804 Los Angeles-Long Beach-Glendale, CA Metropolitan Division $12,096 $5,845 Boulder, CO Metropolitan Statistical Area $11,855 $7,719 San Diego-Carlsbad-San Marcos, CA Metropolitan Statistical Area $11,641 $6,476 Bethesda-Frederick-Gaithersburg, MD Metropolitan Division $11,223 $7,894 Boston-Quincy, MA Metropolitan Division $10,941 $6,389 Newark-Union, NJ-PA Metropolitan Division $10,870 $6,823 Lake County-Kenosha County, IL-WI Metropolitan Division $10,700 $8,127 Source: Gyourko & Sinai (2004), using data from the 2000 Census 16

17 Figure 7: Value of Net Tax Benefits Per Owner-Occupied Housing Unit, by Metropolitan Area (Proportional Financing) $10,000 $8,000 $6,000 $4,000 $2,000 $0 -$2,000 Metropolitan Areas Source: Gyourko & Sinai (2003), using data from the 1990 Census 17

18 Thoughts Housing tax expenditure is expensive Difficult to rein in without an offsetting policy Would lower house prices they are already fragile Benefits are concentrated, costs are spread out What to do? Implement when house prices are already growing Phase in changes Make households whole in terms of income to mitigate negative effects on consumption