In Search of Smarter Homeowner Subsidies

Abstract

Critics have long assailed the federal tax code’s principal homeowner subsidies as lucrative tax breaks for upper income households that are essentially worthless to those financially constrained from purchasing a home. This article examines the subsidies through a different lens and reveals another serious flaw. It demonstrates how the homeowner subsidies, which represent a massive federal investment in homeownership, do very little to contain and instead probably increase costs on others that result from certain types of housing choices and that other federal policies seek to remedy. These negative housing externalities include: (i) blight, deterioration, and public health risks in disinvested housing markets, (ii) an array of individual and societal harms associated with heightened economic and racial housing segregation, (iii) environmental degradation, and (iv) taxpayer funded disaster relief for those who reside in environmental hotspots. In effect, the subsidies pay for housing choices that the government later pays to clean up after.

This article provides several explanations for this disconnect. Among these is an idealization of homeownership, reflected in the tax code, which sees only its benefits. Accordingly, the subsidies reward homeowner decisions at large and are insensitive to the varying amounts of positive and negative externalities that follow from particular types of homeowner choices. For this reason, the article contends that the current subsidies are not “smart.”

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

Keywords: Homeownership, Homeowner Tax Breaks, Federal Income Tax, Disinvestment, Housing Segregation, and Environmental Degradation

JEL Classification: K11