Housing-related Tax Expenditures

As readers may recall, I am a great fan of Matthew Desmond’s Pulitzer Prize winning ethnography Evicted: Poverty and Profit in the American City.  In fact, I use Evicted as an ideal model in Interrogating Ethnography, where I say that it “set an exceptionally high – perhaps the highest possible – standard for the use of evidence in ethnography.”  Even so, I questioned the soundness of some of Desmond’s policy recommendations, particularly his proposal for a national system of housing vouchers, under which, according to Desmond, “Evictions would plummet and become rare occurrences. Homelessness would almost disappear.”  

Objections to such a voucher system are many:  too much new bureaucracy; unpredictable consequences for the rental housing and home sale markets; ineffectiveness for many of the people Desmond himself identified in Evicted, who included a drug addict and an armed robber.  And of course, the massive cost. 

Desmond did not address most of the drawbacks, but he did say something about where the funds could be found. “We have the money,” he explained.  We need only redirect it from “housing-related tax expenditures.”  In other words, Desmond suggested eliminating the mortgage interest and real estate tax deductions, so that the increased revenue could be used to provide rent subsidies for poor people.

My response was to observe the potentially damaging impact on existing home sales and new home construction, as home ownership would become more expensive by some unknowable amount. I wrote,

According to housing economists, an immediate change might well send home values tumbling as much as 20 percent, and might also suppress new construction, thereby throwing carpenters, brick layers, electricians, plasterers, and plumbers out of work.  Or maybe not. Economists are uncertain about the full effect on the housing market if tax preferences were eliminated or reduced, because there are so many moving parts to consider.

My point was not to endorse the current tax system, but only to note that sociologists such as Desmond, and most law professors, like me, step far beyond their expertise when making such recommendations: “My own background does not qualify me to assess the economic and other consequences of a national rent voucher program, but neither does Desmond’s,” I wrote.

It turns out, however, that Desmond was on to something.  The various “housing-related tax expenditures” do represent a huge source of untapped funds that could be redirected for other purposes. As it happens, the recently released GOP tax bill does just that. It limits individual deductions for both mortgage interest and real estate taxes, in order to partially pay for the elimination of the estate tax and a reduction in the corporate tax.

Desmond later wrote an article for the New York Times Magazine in which he criticized the home mortgage deduction as regressive, calling it "the engine of American inequality," so he might not be sorry to see it severely capped.  On the other hand, he no doubt thinks that it would be even more regressive to see savings go toward eliminating the estate tax, reducing the top marginal rate, and creating reduced-rate pass-through taxation for an untold number of closely held (but not necessarily small) businesses, including real estate partnerships.

We will have to wait and see whether Congress includes these provisions in the eventual tax revisions — Megan McCardle explaines them here — assuming they can manage to pass any tax reform at all.

I think we can be confident, however, that no sociologists will be consulted in drafting the ultimate bill.