The distortions in the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code from the preferential treatment of housing are numerous and costly, and have been recognized as being bad policy by economists of all political persuasions. But unfortunately, special interests have allowed the sacred cows of tax politics, the home mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. and the special rates on capital gains of housing, to remain in the tax code. The President’s tax reform panel recommended limiting these distortions, but some members of Congress appear to want the distortions expanded for political purposes. From Texas Insider:
U.S. Sen. John Cornyn, R-Texas, introduced legislation on Friday that would encourage more Americans to own their homes by allowing taxpayers to exclude up to $300,000 ($700,000 if married and filing jointly) of the profit from selling a home.
The Home Ownership Protection Act of 2006 will help lower – and in some cases, eliminate – the barriers Americans face to buying and selling a home, creating a stronger housing market that will promote job creation. The last legislative action on this issue occurred in 1997, when Congress passed a provision that allowed taxpayers to exclude up to $250,000 ($500,000 if married filing jointly) from the sale of their home.
“This legislation recognizes that home ownership lies at the heart of the American dream,” Cornyn said. “House prices have greatly appreciated since 1997, and in the last five years alone, prices have appreciated by more than 55 percent. But the Tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. level has remained static. Generations of Americans have dreamed of safe communities to raise their children and secure their financial futures. Owning a home has become a great part of the American tradition. Each of us is taught that through hard work, savings, and careful planning, we can share in this promise.”
The relevant economic question is whether or not expanding these housing preferences would actually save taxpayers and homeowners any money. If individual buyers have rational expectations, then any future subsidy to housing will merely be priced into the value of the home at the time of purchase, thereby saving the new buyer nothing, and merely producing a windfall to the current sellers.
These types of policies are an example of many policymakers not understanding the Lucas Critique, where policies will merely change individual expectations and produce little real economic effect.
For more on the preferential treatment that housing receives in the federal tax code, check out our previous comments and work on the topic here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here.
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