Fighting stubborn racial disparities in homeowner tax subsidies

In the mid-1950s, Jessica Fulton's grandparents moved from Mississippi to southern Illinois, where they built a new life for their family, she said at a tax policy event earlier this month.

"They created a community," said Fulton, the vice president for policy of the Joint Center for Political and Economic Studies, a nonprofit policy advocacy group focused on improving socioeconomic status and civic engagement among African Americans. "They raised their children. They farmed their own land. They went to church. They created their own little American dream. So what does this have to do with tax policy? Why does it matter? I think that it matters because their economic status was really limited by the realities of their situation. And this isn't necessarily something that the field of economics or tax policy typically accounts for."

Fulton spoke as part of a program featuring a panel of experts in housing and tax policy hosted by the Urban-Brookings Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution focusing on independent analysis. At the event, the panelists talked about the racial disparities of the mortgage interest deduction. Financial advisors and tax professionals often discuss strategies for buying homes and making mortgage payments with their clients, who usually find their largest asset and means of building wealth for the long term in the form of owning their primary residence.

READ MORE: 11 tax tips on mortgages and homeownership 

For Black and Hispanic Americans, who are much less likely to own a home than their white counterparts, the deduction for mortgage interest payments comes in far less handy.

In fact, one panelist suggested that the doubled standard deduction under the 2017 Tax Cuts and Jobs Act that may expire at the end of next year has proven more effective than the itemized exemption for mortgage interest in lifting more people toward being able to buy a home. Other experts expressed support for other tax credits they viewed as more beneficial as well.

"The disparities are just this function of not just inequality in homeownership, but also income inequality. And it's important to keep in mind that — even among households with the same income — homeownership rates are considerably lower for minority households, if you look throughout the income distribution," Neil Bhutta, a special advisor to the Philadelphia Fed's Consumer Finance Institute, said on the panel. "And so those two things combined to make the mortgage deduction particularly beneficial to white households."

While he noted that he's "not really a tax person" and called the persistent homeownership gaps "even within income" a puzzling problem, Bhutta said it would be difficult to imagine "being able to keep the home mortgage deduction and make it more equitable, without broader changes to the tax code and the standard deduction and things like that."

The panelists spoke the same day that a study by the Tax Policy Center found that white families received 21% more than the average benefit of the mortgage interest deduction in 2019, while Black households got 54% of the mean and Hispanic Americans got 38%. If the Tax Cuts and Jobs Act expires at the end of next year, the share of all families claiming the mortgage interest deduction will double, according to the report's authors, Janet Holtzblatt, Robert McClelland and Gabriella Garriga.

"Although the average benefit will rise for all groups, the relative disparities will not change substantially," they wrote. "A surprising result is that, in the top income group, Black taxpayers receive a disproportionately larger benefit relative to white taxpayers under TCJA, but that relationship will be reversed after the expiration of the individual income tax provisions."

Regardless, the study added to a long paper trail documenting the links between the legacy of housing discrimination in America and the enduring racial wealth gap. 

READ MORE: How taxes reflect and exacerbate racial wealth disparities 

"If you actually are able to benefit from the home mortgage interest deduction, then you're likely to be one who's able to take advantage of the things that it brings," Derrick Plummer, the director of corporate communications for online filing software firm TurboTax parent Intuit, said on the panel. "But if you are not a homeowner, if you can't even get into homeownership, let alone be able to stay in homeownership, that might not necessarily be the case. What we also know is that our tax code is extremely complicated — more than 6,000 pages long. And what we also recognize is that every April, the racial wealth gap is exacerbated, because of so many different things that we have seen over decades — whether it has been people of color being left out of a lot of these programs or whether it has been the inability for folks to actually obtain homeownership through a number of ways."

The panelists and speakers shared other tax incentives they argued may help more Americans build wealth than the mortgage interest deduction. At its root, the main issue revolves around the goal of accumulating wealth, according to Kamila Sommer, the chief of the Consumer Finance Section of the Fed's Board of Governors.

"It is not obvious to me that we have to have explicit policies targeting, promoting homeownership," Sommer said, noting that the higher standard deduction under the Tax Cuts and Jobs Act boosted renters' incomes. "It does increase their savings rate and allows them to get into homeownership or accelerate or aid the transition into homeownership. The mortgage interest rate deduction — just generally how I perceive it — is that it tends to benefit existing homeowners. And it's very well-liked, but you can have policies which help people to increase household income and help them achieve homeownership through saving and ability to qualify for mortgages." 

Tax credits for buying or building homes could hike up the share of households able to afford a home as well, according to Michael Neal, a senior fellow at the Urban Institute. Policymakers should consider "thinking about what tax systems do, not just in terms of the demand side, but also what it can do on the supply side as well," he said.

"Certainly, the tax credit — at least the way that I read the literature — can have a relatively more powerful impact among those that have lower incomes," Neal said. "When we think about housing supply, we are thinking about small builders, and the degree to which tax policy can certainly help to change their calculus. That could also have implications in terms of their ability to bring more affordable housing stock to market."

READ MORE: Ask an advisor: Should I finish my mortgage right now?

The expanded child tax credit — a pandemic-era policy that has since lapsed and is now in a bill that's currently stalled in the U.S. Senate — brought some economic relief to families as well, Fulton noted.  

"It lowered child poverty for Black children, but it also put money in the pockets of people across race and ethnicity, and kept our economy running — like it helps people to put food on the table," Fulton said. "I am a firm believer that if we can be really thoughtful about how we design more inclusive policies — what is it, 'The rising tide lifts all boats' — it's almost like it brings all of us. So that's been really exciting to see."