	Introduction

There has been increased concern over the size and sustainability of the United States' recent deficits and the country's long-run budget outlook. This concern has brought the issues of the federal government's revenue needs and fundamental reform of the tax system to the forefront of congressional debates. One place Congress may turn to address these issues is the set of tax benefits for homeowners. The Joint Committee on Taxation (JCT) has estimated that the cost to the federal government in terms of foregone revenue from these benefits will be approximately $136.3 billion annually between 2014 and 2017. Economists have identified the set of tax benefits for homeowners as one area in which reform may improve economic efficiency. This report focuses on the two largest federal tax benefits available to homeowners—the mortgage interest deduction and the deduction for state and local property taxes. The goals of this report are five-fold: (1) briefly summarize the trends in homeownership; (2) provide an overview of what tax benefits are available; (3) analyze the rationales commonly provided for offering such benefits; (4) analyze the effect of the mortgage interest deduction and property tax deduction on the homeownership rate, housing consumption, and the economy; and (5) present policy options. These long-term trends in homeownership behavior may be overshadowed by more recent trends in foreclosures. These tax benefits and their associated budget impacts are listed in Table 1 . The three most expensive tax incentives in the JCT's estimate are the mortgage interest deduction ($77.3 billion annually), the itemized state and local property tax deduction ($31.5 billion annually), and the exclusion of capital gains on the sale of a principal residence ($26.5 billion annually). First, a high homeownership rates may bestow certain benefits to society as a whole such as higher property values, lower crime, and higher civic participation, among others. Second, homeownership may promote a more even distribution of income and wealth, as well as establish greater individual financial security. And lastly, homeownership may have a positive effect on living conditions, which can lead to a healthier population. Positive Externalities

Tax benefits for homeowners are most often rationalized on the basis that homeownership generates positive externalities. Economic Analysis of Current Tax Benefits for Homeowners

While some policy makers may or may not want to promote homeownership based on the reasons just discussed, a separate issue that arises is—what are the effects of the mortgage interest deduction and property tax deduction? Household income has also been found to influence the home-buying decision, although its effect on the decision to become a homeowner is smaller than the ability to finance a down payment. Providing preferential tax treatment for homeowners can improve the long-run performance of the economy by encouraging capital and labor to flow to the higher return producing housing sector. Similarly, House Ways and Means Committee Chairman Dave Camp recently released a comprehensive tax reform draft that proposes limiting the size of mortgages eligible for the deduction. In 2005, President George W. Bush's Advisory Panel on Federal Tax Reform (Tax Reform Panel) also proposed replacing the mortgage interest deduction with a credit. A similar option was presented by the Congressional Budget Office (CBO) in 2009.
Concern has increased over the size and sustainability of the United States' recent budget deficits and the country's long-run budget outlook. This concern has brought the issues of the government's revenue needs and fundamental tax reform to the forefront of congressional debates. Congress may choose to address these issues by reforming the set of tax benefits for homeowners. According to the Joint Committee on Taxation, federally provided tax benefits for homeowners will cost approximately $136.3 billion annually between 2014 and 2017. Reducing, modifying, or eliminating all or some of the current tax benefits for homeowners could raise a substantial amount of revenue, while simultaneously simplifying the tax code, increasing equity among taxpayers, and promoting economic efficiency.
This report focuses on the two largest federal tax benefits available to homeowners—the mortgage interest deduction and the deduction for state and local property taxes. While other tax benefits for homeowners exist, these two particular benefits are the most expensive in terms of forgone revenue to the federal government. Between 2014 and 2017 the mortgage interest deduction and property tax deduction are estimated to cost around $77.3 billion and $31.5 billion annually. Congress may therefore consider modifying these two tax benefits to raise revenue. The mortgage interest deduction and property tax deduction are also the two tax benefits proponents most often argue promote homeownership. Economists, however, have questioned this claim.
The analysis presented in this report is structured along two dimensions. First, the analysis focuses on the rationales commonly offered for providing tax benefits for homeowners, mainly that homeownership (1) bestows certain benefits on society as a whole such as higher property values, lower crime, higher civic participation, among others; (2) is a means of promoting a more even distribution of income and wealth; and (3) has a positive effect on living conditions, which can lead to a healthier population. Although these benefits may exist, the analysis presented in this report highlights the difficulties that economists have encountered in attempting to establish their existence or magnitude.
The analysis then turns to examining the effect that the mortgage interest deduction and state and local property tax deduction have on the homeownership rate, housing consumption, and the economy. The analysis in this report suggests that these tax incentives may have a larger effect on the size of homes purchased than on the decision to become a homeowner. The possibility that attempting to promote homeownership via the tax code may distort the allocation of capital and labor, which could hinder the performance of the economy in the short-run and long-run, is also raised. In the process of conducting the analysis, this report briefly summarizes the historical trends in homeownership and the more recent trends in foreclosures. The report concludes with policy options that Congress may find useful as it moves forward, including proposals made by House Ways and Means Chairman Dave Camp, President Obama's Fiscal Commission, President George W. Bush's Tax Reform Panel, and the Congressional Budget Office.