Middle Class on the Dole

ARE your parents on the dole?

Do they feed at the government trough, accepting a massive handout from the federal government at the expense of the needy?

"Of course not!" you say. "My parents are hardworking, tax-paying citizens. They wouldn't think of taking a government handout."

But if your parents own a home, chances are almost one in two that they benefit from the most expensive welfare program in the country. It costs more than Medicaid. It costs more than unemployment compensation. It costs three times as much as Aid to Families with Dependent Children (AFDC), the program commonly known as "welfare."

I refer to the home mortgage interest deduction, the cornerstone of America's gargantuan, secret welfare state for the middle class.

It say "secret" because the cost is hidden in the tax code. Beneficiaries of the mortgage interest deduction don't receive a government check in the mail. They simply write down on their tax returns the amount of interest they paid on their home mortgage, and thereby avoid a substantial part of their income tax bill.

It's very neat, very simple and very expensive. The mortgage interest deduction will cost the federal government some $32.2 billion this year, plus another $10.4 billion for home-owner property tax deductions. Although no checks are written, this money constitutes a huge subsidy--pure and simple--to homebuyers. When the government forgives part of your tax liability, it has exactly the same effect as sending you a welfare check.

Not all subsidies are bad, of course, especially when they are intended to promote something as important as housing. But just like any other government program, housing subsidies should be efficient, progressive, and fair. Because the mortgage interest deduction is none of these, it ought be abolished.

PROPONENTS bill the mortgage interest deduction as the average citizen's ticket to the American Dream--home ownership. Unfortunately, the average citizen gets only a small portion of the benefits. The mortgage interest deduction is worth far more to the rich, who are in higher tax brackets and tend to own more expensive homes.

Last year, 23 percent of the value of mortgage interest deductions went to the two percent of taxpayers with incomes greater than $100,000. A 1981 study by the Congressional Budget Office shows three-fourths of the benefits go to the richest fifth of taxpayers.

And most taxpayers don't get anything at all from the deduction. The 66 percent of taxpayers who do not itemize their deductions get nothing. Thirty-eight percent of homeowners with mortgages do not claim the deduction. And tenants, whose incomes average half that of homeowners, are not eligible for any deduction. Nor are citizens who are so poor that they owe no taxes.

The mortgage interest deduction is about the most inefficient means imaginable for chaneling housing assistance to the needy. It is far less efficient, for example, than direct subsidies. Yet it was these subsidies that suffered more than any other program from Reagan's budget-cutting axe. In 1981, the federal government spent $33 billion on direct housing assistance. By 1989, it had been slashed to $8 billion. During the 1970s, the federal government built anywhere from 200,000 to 300,000 units of low-income housing per year. This year, it will build 15,000.

How does a program that discriminates against renters and the poor, benefits the greedy at the expense of the needy, and costs the federal government untold billions in revenue survive year after year?

To start with, the mortgage interest deduction has the National Association of Realtors (NAR), one of the richest and most powerful lobbies in the nation, steadfastly behind it. When former Treasury Secretary Donald T. Regan's tax reform plan proposed eliminating the the mortgage interest deduction for vacation homes, NAR president David Roberts denounced it as a prescription for "less growth in the American standard of living and a lower quality of life."

Lower quality of life for whom? People with second homes on Martha's Vineyard? Do they really deserve a multi-billion dollar government handout?

But the mortgage interest deduction has an even more powerful ally than the real estate industry--they have some liberal Democrats and members of Congress. When Ronald W. Reagan hinted during the 1984 campaign that just maybe the deduction could be reformed, Walter F. Mondale called the suggestion "the worst single idea around in tax law."

The mortgage interest deduction also benefits from its low political visibility. It's easier to spend $30 billion through the tax code than to mail out one million checks for $30,000. It wasn't until 1974 that Congress and the President were even required to list the revenue loss of "tax expenditures" such as the mortgage interest deduction as costs on the budget.

The mortgage interest deduction has the privilege of being one of the most sacred of sacred cows in the tax code. During the debate over the 1986 tax reform bill, proposals to limit the deduction to primary residences and to cap the rate of deduction at 14 percent were soundly defeated in Congress.

Every attempt to introduce some measure of fairness into the deduction has met with protests about the "sanctity of home ownership." Mondale went so far as to call the mortgage interest deduction "the only deduction that is in the tax law that does any good at all for the average American."

The problem with the deduction is that the "average American" gets precious little out of it. You could scarcely imagine a system that distributes housing assistance as regressively as does the mortgage interest deduction.

Surely it is the responsibility of a society as wealthy as ours to ensure that no one has to sleep on a grate. Just as surely, it is the height of unfairness to take away housing funds from the poor while maintaining lavish deductions for middle-and upper-class homeowners. Congress should eliminate this $32 billion dollar handout to the wealthy and use that money to provide adequate housing for the truly needy.