Shades of the American dream.

• Author: Brown, Dorothy A.
• Position: Tax subsidies for black homeowners

I will give you an example of how race affects my life. I live in a place called Alpine, New Jersey.... My house costs millions of dollars.... In my neighborhood, there are four black people. Hundreds of houses, four black people. Who are these black people? Well, there's me, Mary J. Blige, Jay-Z and Eddie Murphy. Only black people in the whole neighborhood.... Do you know what the white man that lives next door to me does for a living? He's a ... dentist!

--Chris Rock, Kill the Messenger (HBO Home Video 2009)

TABLE OF CONTENTS I. INTRODUCTION II. FEDERAL TAX SUBSIDIES FOR HOUSING A. Tax Benefits Increase the Cost of Homeownership, But Do Not Impact the Decision to Purchase A Home B. Federal Tax Laws Significantly Subsidize Homeownership III. CLASS AND HOMEOWNERSHIP TAX BENEFITS A. Introduction B. Homeownership Rates by Income Levels C. Tax Benefits and Class D. Summary IV. RACE AND HOMEOWNERSHIP TAX BENEFITS A. Introduction B. Homeownership Rates by Race C. Homeownership by Race and Income D. Homeownership Quality: The Ten Drop Rule E. Tax Benefits and Race F. Blogosphere Attention G. Summary V. RACE- AND CLASS-BASED SOLUTIONS: ENCOURAGING HOMEOWNERSHIP FOR ALL A. Introduction B. Solutions to End Race and Class Discrimination 1. Convert the Deduction into a Refundable Credit 2. Allow Losses to be Deductible 3. Allow Credit for Racially Diverse Neighborhoods 4. Solutions Rejected CONCLUSION I. INTRODUCTION

If Chris Rock is right, and there are only four blacks in his neighborhood, then Chris Rock's home is an excellent financial investment. (1) Home ownership in Alpine, New Jersey, is an excellent financial investment precisely because very few blacks live there. Chris Rock and all other blacks in America are subject to the reality that once a neighborhood has more than 10% black homeowners, the home values decline. (2) While recent events show the downside of homeownership for many Americans, (3) for African-Americans generally, homeownership has always been a mixed blessing.

Unlike Chris Rock, most African-Americans do not live in overwhelmingly white, wealthy neighborhoods. (4) For the majority of blacks, homeownership is a poor financial investment. (5) To be sure, there are other non-financial benefits received by black homeowners, including better neighborhoods, better schools, and less crime. (6) But the vast majority of whites receive better neighborhoods, better schools, less crime and a good financial investment when they become homeowners. (7)

Homeownership in America has historically been viewed as a solid investment both financially (8) and as a means of living the American Dream. (9) This Article will show that homeownership has never been a good financial investment for either the vast majority of African-American homeowners or for low-income homeowners. Government subsidies for homeownership, especially federal tax subsidies, create winners and losers generally along race and class lines.

Middle- and upper-income taxpayers who are overwhelmingly white benefit the most from federal tax subsidies for housing. (10) On the other hand, the majority of low-income taxpayers, regardless of race, and the majority of African-American taxpayers, regardless of class, are the least likely to benefit from federal tax subsidies for housing. (11) Given the near collapse of our housing industry, now may be the time to re-think the government's generous federal tax subsidies for homeownership.

It is estimated that for fiscal year 2009, the loss in tax revenue from the tax subsidies for housing will be in excess of $207 billion. (12) Adding insult to injury, economists agree that virtually no one buys a house because of those tax subsidies, but the subsidies do increase the cost of housing. (13) Federal tax subsidies for homeownership are expensive and inefficient, with race and class key determinants of their receipt. Finally, homeownership increases wealth disparities by race in America. (14) Therefore, the current subsidies for homeownership are too costly to retain in their present form.

Part II begins by discussing the literature demonstrating that tax subsidies encourage virtually no one to purchase a house. The tax subsidies benefit those who were already going to buy homes. The literature does conclude, however, that tax benefits increase the cost of housing and taxpayers purchase more expensive homes than they would without the tax benefits. Part II then briefly describes the well-known federal tax benefits associated with homeownership: deductions for mortgage interest and real property taxes, (15) an exclusion from income of the imputed rental value of our homes, (16) and an exclusion from income of the gain on the sale of our personal residence. (17)

Part III provides a class-based analysis of federal tax benefits for homeownership. Most low-income taxpayers are not homeowners and are not eligible for federal tax benefits. For those low-income taxpayers who are homeowners, many do not itemize deductions and thus cannot receive the benefits of the mortgage interest deduction, which has been included in the price of the asset that they have purchased. Increased housing costs caused by the tax subsidy make it more difficult for low-income taxpayers to buy homes. In addition, low-income homeowners often sell their homes at a loss and cannot deduct that loss. On the other hand, middle- and upper-income taxpayers--regardless of race--are most likely to become homeowners and most likely to itemize deductions; however, they may be subject to the alternative minimum tax and lose a portion of their real property tax deductions. Further, upper-income taxpayers are most likely to benefit from the exclusion of imputed rental income as well as the exclusion from gain on the sale of their personal residence.

Part IV provides a race-based analysis of federal tax benefits for homeownership. Tax laws disadvantage black taxpayers and other taxpayers of color in three different ways. (18) First, tax laws only benefit homeowners, and whites are far more likely to be homeowners than any other racial or ethnic group. (19) Second, the housing market penalizes neighborhoods where more than 10% of the homeowners are black, while the housing market gives a bonus to neighborhoods where homeowners are at least 90% white. (20) Most black homeowners live in majority black neighborhoods, and most white homeowners live in majority white neighborhoods. (21) As a result, there is an effective cap on the appreciation for black homes when compared with their white counterparts living in 90% white neighborhoods. (22) Federal tax policy's exclusion from income for the gain on the sale of their homes will always disadvantage blacks who, unlike Chris Rock, do not live in 90% white neighborhoods when compared to their white counterparts who do. Finally, the exclusion for imputed rent will similarly be worth more the more the home is worth. Given that there is an effective cap on the value of black homes that are not in overwhelmingly white neighborhoods when compared to white homes that are, the exclusion will be worth more to middle- and upper-income white homeowners who live in overwhelmingly white neighborhoods than middle- and upper-income black homeowners who do not. This Part also discusses blogosphere comments about earlier drafts of the Article.

Part V provides three solutions to the race- and class-based problems identified herein. It begins with a critique of prior articles that have analyzed housing tax subsidies from a race (23) and/or class (24) perspective. The critique shows that proposed solutions either ignore the race-based discrimination faced by homeowners of color, or would make things worse for black homeowners. Part V then offers three different solutions which will better target reform to those low-income and black middle- and upper-income homeowners currently disadvantaged by federal tax policies.

First, refundable credits should be available for housing to insure low-income homeowners who have purchased an asset with the tax deduction built into the price will be able to receive a tax benefit. Second, losses on the sale of personal residences for low-income homeowners should be allowed to offset ordinary income. Third, housing tax benefits should only be allowed for homes in "racially diverse" neighborhoods. Instead of reinforcing the race-based discrimination currently existing in the housing market, tax law should counteract it. A tax subsidy for homeowners in "racially diverse" neighborhoods would make homes in those neighborhoods more valuable as compensation for the earlier market penalty. The Article concludes by noting that, to the extent that tax policies are imposing a barrier to homeownership on the basis of race and/or class, those policies must change. These extreme financial times call for extreme reform measures.

2. FEDERAL TAX SUBSIDIES FOR HOUSING

   1. Tax Benefits Increase the Cost of Homeownership, But Do Not Impact the Decision to Purchase A Home

      Numerous articles have examined the tax benefits associated with housing. (25) Since the beginning of our income tax until the Tax Reform Act of 1986, all interest was deductible. (26) While the legislative history on the allowance of personal interest is sparse, when Congress amended the Internal Revenue Code to continue to allow the mortgage interest deduction in 1986, while disallowing, for example, a deduction for credit card interest payments, it cited encouraging homeownership as justification (27) notwithstanding the empirical data that shows that tax benefits generally do not encourage taxpayers to purchase homes, but encourage taxpayers to purchase bigger, more expensive homes.

      Generally, whether homeowners will purchase more expensive homes is largely a function of supply and demand. The more inelastic the supply, the more the mortgage interest deduction will result in a price increase. If housing stock is fixed, the mortgage...