The Federal Tax Subsidy to Housing and the Reduced Value of the Mortgage Interest Deduction

This paper estimates the federal income tax subsidy and the associated deadweight loss to both owner-occupied and rental housing. We focus on the tax subsidy after passage of the Tax Reform Act of 1986 and add more detail than other work in this literature regarding the distribution of the subsidy among income classes and household types. Furthermore, attention is given to an aspect of the subsidy to owner-occupied housing that has received little attention: the value of the mortgage interest deduction and how its value is affected by the standard deduction and the amount of nonhousing itemized deductions. In particular, we demonstrate that TRA has introduced a substantial anti-mortgage debt bias, especially for low and moderate income households.