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In his book The Hidden Welfare State (1999), Christopher Howard wrote:

If one had to name a Holy Trinity of U.S. social programs in the late twentieth century, it would consist of Social Security, Medicare, and the home mortgage interest deduction. All three programs are budgetary entitlements, protected from the annual appropriations process…

Of the three programs, the home mortgage interest deduction has arguably the strongest base of political support. It has existed longer than Social Security or Medicare, thus appearing even more firmly a part of the “natural” political landscape. Like Medicare (and unlike Social Security), it can depend on third-party providers for support. Home builders, building material suppliers, developers, realtors, lenders, and construction unions consider the program essential to their livelihoods…how a small wrinkle in the original tax code became, many decades later, a huge and sacrosanct social program…is that the structure of tax expenditures as a policy tool makes growth without advocacy possible. As more people pay income taxes and marginal tax rates increase, the value of not paying taxes goes up.

And since 1999, the total amount of housing subsidized through tax expenditures has gone up quite a bit.

It’s a bit mind-boggling when you actually realize how much money goes through this mechanism. The new Subsidyscope Tax Expenditure Database by Pew is worth your time, particularly their dissection of the subsidies we give towards housing. They created a database estimates by the Department of Treasury and the Joint Committee on Taxation. Since they differ, for the following graphs (click on each to enlarge) I take the average of the two different sources by year adjusting for inflation (note to Pew, have data in real and nominal dollars if possible). Here’s Ezra Klein with more.

First, when it comes to housing there are major, major costs involved with the way we subsidize housing through Tax Expenditures:

That’s almost $200 billion dollars a year. There are many ways we use tax expenditures to subsidize housing, but rather than graph them all I want to point out that there are three main mechanisms that account for over 80% of the subsidy:

Here is Pew’s description for each deduction or exclusion:

Deductibility of mortgage interest on owner-occupied homes

The baseline tax system would allow the write-off of expenses incurred in earning income. It would not allow the deductibility of expenses when income or the return on investments are not taxed. In contrast, the Tax Code provides that owner-occupants of homes may deduct mortgage interest on their primary and secondary residences as itemized nonbusiness deductions even though the value of owneroccupied housing services is not included in a taxpayers taxable income. In general, the mortgage interest deduction is limited to interest on debt no greater than the owners basis in the residence, and is also limited to interest on debt of no more than $1 million. Interest on up to $100,000 of other debt secured by a lien on a principal or second residence is also deductible, irrespective of the purpose of borrowing, provided the debt does not exceed the fair market value of the residence.

Deductibility of State and local property tax on owner-occupied homes

The Tax Code allows owner-occupants of homes to deduct property taxes on their primary and secondary residences even though they are not required to report the value of owner-occupied housing services as gross income.

Capital gains exclusion on home sales

The baseline tax system would not allow deductions and exemptions to certain types of income. In contrast, under current law, a homeowner can exclude from tax up to $500,000 ($250,000 for singles) of the capital gains from the sale of a principal residence. The exclusion may not be used more than once every two years.

And that’s just a total amount, that isn’t the cross-section of who gets the subsidy. You can see how regressive the current system is when you look at this graph from the Urban-Brookings Tax Policy Center document, How to Better Encourage Homeownership (2005), which includes multiple ways we subsidize housing:

People who make 50K a year make just enough from this subsidy to defend it to the death, even though this subsidy mostly goes to those making over 500K a year. From an elite’s point of view, you couldn’t design it any better.

Source: Pew’s Tax Expenditure Database on Housing Subsidies