When you think of subsidized housing,
you probably picture a scene from
the PJs or The Wire. Don't. Funding for low-income housing accounts
for only a small portion of government housing subsidies in the US.
The US Department of Housing and Urban
Development (HUD)
hasn't funded the construction of a new public housing unit since 1994.
However, that hasn’t entirely halted Housing Authorities’ groundbreakings and
ribbon cuttings: Between 1993 and 2010, HUD competitively awarded
$6.7 billion in HOPE VI funds to demolish or redevelop the most
distressed public housing projects across the country, creating housing
developments with a mix of public housing and market rate units. While the
initiative certainly improved the physical quality of the projects it reached,
it also reduced the nation's public housing stock by
39,400 net units.
Public housing refers to a specific
type of low-income housing – properties developed, owned, and operated by a
HUD-funded Housing Authority – and it is a dying breed. Instead, HUD now
supports housing for low income families primarily through two mechanisms: (1)
vouchers awarded to low-income households to supplement what they can afford to
pay towards rent or a mortgage payment, and (2) privately-owned housing, the
construction of which is partially or completely financed with public funds
(grants or low/no-interest loans), that is reserved for low-income tenants or
purchasers at a
rate deemed affordable. When combined with local programs and regulations, the full list
of subsidies (a term that I am using loosely to mean any intervention that
makes a housing unit available at a price below the market rate) that specifically
target low- or moderate-income households here in the District of Columbia looks
something like this:
Supply-Side Subsidies - public money (or
land) spent, granted or loaned (at a favorable rate) to develop or rehabilitate
housing units that, in return, will only be rented or sold to low- or moderate-income
households at a price they can afford:
Demand-Side Subsidies - tax dollars allocated, granted or loaned (at a favorable rate)
to individuals and families to supplement their ability to pay for housing
costs, including rent and mortgage payments, down-payments, and property taxes:
Zoning Regulations - rules or one-time determinations that require the construction
of affordable housing units (rental or for sale) as part of a larger
development, in exchange for government relaxation of applicable zoning
restrictions.
- Inclusionary Zoning (IZ)
- Planned Unit
Development (PUD) approval
Government deserves a cookie for the
sheer number of low-income housing policies and programs it has implemented,
but when you look at all housing subsidies dished out (not just those that
target the poor), the above list only represent a drop in the bucket.
The Home Mortgage Interest Deduction
By far, the biggest government subsidy
the government offers to help individuals and families pay for housing is the
Home
Mortgage Interest Deduction (MID), which was
claimed on about
26% of all DC individual
tax returns. The Mortgage Interest Deduction allows homeowners to reduce their
Adjusted Gross Income (what you pay taxes on) by the amount they paid towards
interest on their first $1 million of home mortgage debt. Oh and BTW? You can
also deduct the interest on your vacation home (just in case the debt on your
primary residence doesn't get you to the million dollar cap). It’s easy to get
caught up in semantics on this issue: Unlike a voucher, which is a direct
government expenditure and therefore a more tangible subsidy, the MID is instead
foregone government revenue, which is more
politically palatable than a direct outlay, but serves the same purpose. Consider
two scenarios: (A) getting $10 taken out of your paycheck before you ever see
it; and (B) receiving full pay but then having to give $10 right back. If there
is a difference between the two, then it is only psychological.
The cost of Home Mortgage Interest Deduction
to the federal government amounts to a cool
$100 billion dollars annually. Compare
that to the
annual budget of the biggest low
income housing programs:
One natural reaction to these statistics is to suppose that, as an entitlement
program available to all homeowners (about 2/3 of the country), the Mortgage
Interest Deduction is likely a shallower subsidy disbursed to a much broader
pool of recipients than something like Housing Choice Vouchers, which target a
specific income range. That’s true to an extent, but it turns out that the
biggest individual beneficiaries of the MID actually receive a greater (and
more reliable) subsidy than recipients of housing vouchers.
Comparison of Vouchers and the Mortgage Interest Deduction Subsidy
in DC
Based on
approximate figures provided by the
DC Housing Authority (DCHA), the average housing voucher in 2009 was worth $967
monthly. Most (at least 75%) vouchers are reserved for households earning no
more than 30% of the
Area Median Income, which today translates to a maximum of $32,250 (75 hours
per week at minimum wage) for a family of four. Using the industry-standard
assumption that households can afford to pay 30% of their income on housing, a
family at the upper limit of this spectrum can afford to pay $806 per month for
housing. Since most of the families eligible for vouchers earn less than the
upper limit, it sounds about right that it would take $967 per month per
household to get them into decent housing (
Fair Market Rent for a 2BR home in DC is $1,506). This is a steep subsidy,
and the overall federal low income housing budget is not astronomical only
because, unlike food stamps or Medicaid, housing vouchers and public housing
are not entitlement programs, meaning that even if you qualify, you may not
receive the benefit. DCHA spends $130 million per year to provide vouchers to
11,200 households, but there are an additional
25,000 to
37,635 on the waiting
list.
In comparison, the average subsidy to a
DC resident who claims the Mortgage Interest Deduction is $331. But unlike a
voucher which increases with need, the MID subsidy rises in proportion to the
cost of your home and your marginal tax rate. Take a look at who claims the
deduction, and how much it costs the government, on average, for each income
range:
Data
Source: http://www.irs.gov/taxstats/article/0,,id=171535,00.html
Lower income households are less likely
to claim the Mortgage Interest Deduction because (A) they are less likely to
own their home, and (B) the sum of their itemized deductions (including
mortgage interest payments) is less likely to exceed the standard deduction.
The percentage of tax returns claiming the MID for each income range reflects
this, with only 9% of households earning under $50k taking the deduction and
80% of households earning over $200k deducting their interest payments.
While the subsidy does increase with
income, remember that there is a cap to the amount of interest that can be
deducted (only that which is paid on mortgage debt up to $1 million). Here’s a
hypothetical scenario to illustrate how one might achieve the maximum benefit from the
MID: You take out a $1 million loan from the bank at 5% interest to buy a
big-a$$ house. Over the first 5 years you would pay $240,461 in interest on that loan (an average
of $48,092 per year). If you make earn
enough money to buy a million dollar house (not extremely uncommon in DC), then
your marginal tax rate is probably 35%. Because you can deduct your interest
payments from your income, you reduce your tax burden by 0.35 x ~$48k: about $1,402
per month, or 1.5 times what the average voucher holder receives. What’s even
more kush about this subsidy is that there is no waiting list, and the benefit
never expires!
While
affordable housing advocates and local politicians
nobly debate
over whether local tax money should be used to finance the construction of low-income
units or for vouchers, the federal government continues its backwards system of
giving homeowners (renters, of course, get nathan) a guaranteed subsidy that is
disproportionately doled out to the rich. There are a number of ways we could
reform the Mortgage Interest Deduction, for example by lowering the cap or by
eliminating it completing, but no matter what, an understanding of the subsidy
must inform our perception of welfare programs in this country and should be
central to any discussion about housing policy.