Mortgage interest deduction creates suburban sprawl

May 31, 2013

Although federal housing subsidies like the Mortgage Interest Deduction (MID) are offered to provide affordable housing and stabilize communities, they end up creating sprawling suburban areas rather than benefiting the densely populated, high-growth inner city areas. This happens because more subsidies are given to single-family houses (which usually belong to richer people), rather than to new apartment complexes or multifamily residences.

Homeowners benefit from Mortgage Interest Deduction

A study by Smart Growth America surveyed the federal government’s $450 billion in annual real estate spending. About 84 percent of total federal spending on housing is directed at single-family home ownership.

However, only 65 percent of American households own homes. Most renters live in multifamily buildings. The Smart Growth America study says that the largest tax expenditure is the MID which permits homeowners to lessen their taxable income by the interest amount paid on their mortgage. But, the MID “is only claimed by homeowners, not renters, who itemize their taxes. This skews the deduction predominantly to higher income households that own their homes.”

Inner city areas lose out

Households that make more than $200,000 get almost three times the subsidy of all other households combined. The blog West North points out, “Inner-city areas with low rates of homeownership, low incomes (and thus fewer residents who itemize deductions), and relatively lower property values are receiving far less of America’s fattest housing subsidy — the mortgage-interest personal income tax deduction — than their better-off suburbs.”

West North also remarked that “the bigger picture is that this is a subsidy that overwhelmingly benefits wealthy people who have expensive houses, and big mortgages to match — and thus benefits “coastal elites” more.”

Federal income tax revenue foregone

What’s more, the Smart Growth America study also found that “In 2011, approximately 30 percent of households that claimed the MID also claimed the deduction on a second home.”This contributed to the foregone federal income tax revenue.

A Pew Center on the States’ report said, “In tax year 2011, filers deducted about $360 billion in mortgage interest, resulting in roughly $72 billion in forgone federal income tax revenue.” Changes in policy could result in more benefits for everyone, rather than a few.

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Category: Infrastructure, Resources

About the Author ()

A graduate in English Literature from St. Stephen’s College, Delhi, India, Nupur also has an MBA from the Faculty of Management Studies, Delhi University. Nupur is currently trying to be as savvy a cook as she is with a book. She likes watching plays and sunsets. Nupur first lived in Kolkata and then for a decade in Delhi, still her favorite city.

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