The assassination of Martin Luther King made possible the signing of the Civil Rights Act of 1968, more commonly known as the Fair Housing Act, a week later. It made it illegal to discriminate on the basis of race when it comes to housing. This week marks its 50th anniversary. This week also reminds us of the annual tradition of filing our tax returns. Although the Fair Housing Act prohibits discrimination on the basis of race, we observe in our tax system how government subsidies for homeownership continue to be awarded on the basis of race.
The most well-known tax break for homeownership is the deduction for mortgage interest paid. For 2017 the estimated revenue loss from that tax break is projected to be $65.6 billion. By comparison, the Department of Housing and Urban Development’s net budget for 2017 was just under $40 billion. Even with the changes made by the 2017 tax bill, mortgage interest can still be deducted on up to two homes with a total mortgage of up to $750,000. Homeownership receives significant tax breaks, but not housing generally. There is no tax break for rent payments.
While the majority of whites (73%) and Asians (58%) are homeowners, the minority of blacks (42%) and latinos/as (47%) are. The majority of blacks and latinos/as are renters and their housing costs are not eligible for tax subsidies. In reality, the tax subsidies for homeownership leaves most homeowners out. An analysis of 2014 tax returns showed that only one in five tax returns claimed home mortgage interest deductions. That is because some homeowners do not have a mortgage, while other homeowners have low mortgage interest payments such that they are better off taking the higher standard deduction amount. Taxpayers can select whichever amount is greater: their itemized deductions which will include amounts paid for mortgage interest, or the pre-determined standard deduction amount. By the way, as a result of the recent tax law which significantly increased the standard deduction amounts, we can expect even fewer homeowners to benefit from the mortgage interest deduction going forward.
The percent of tax returns claiming a mortgage interest deduction does increase as income rises which leads many to think this is a class and not a race based problem. For example, a Center on Budget and Policy Priorities report analyzing 2012 tax returns showed that in 2012, 77 percent of the benefits of the mortgage interest deduction went to homeowners with incomes in excess of $100,000, while almost half of homeowners who are mostly middle and lower-middle income with mortgages did not receive any tax benefit. However the report ignored the role of race. Theirs was a familiar choice particularly since the Internal Revenue Service does not collect statistics by race. That fact has made it difficult, but not impossible, for me to analyze the racial impact of tax policy decisions, including those related to homeownership. Enter the hero of today’s story: the Tax Policy Center.
The Tax Policy Center studied zip code level data on taxes and demographics. They too found that zip codes in the highest income level took the mortgage interest deductions three times more than zip codes in the lowest income level. However, the study concluded that “zip codes with high claiming rates tend to be disproportionately white, middle-aged, and married.”
That study also found wide variation in who benefits from the mortgage interest deduction across zip codes. “Among the high-claiming zip codes, 5.6 percent of the population is African American, [and 7.4 percent is Asian], and 82.5 percent of the population is white. Among the lower-claiming zip codes, 13.4 percent of the population is African American, [4.5 percent is Asian] and 73.3 percent of the population is white.”
Even when we compare black and white homeowners, blacks get left behind when it comes to tax subsidies. In the zip codes most likely to take advantage of the mortgage interest deduction, there are fewer black homeowners living in those neighborhoods eligible to take advantage of the tax break than blacks at lower income levels. I argue that is because blacks and whites experience homeownership differently not because blacks have less income than whites, but because of white preferences to live in virtually all-white neighborhoods. Sociologists Maria Krysan and my former Emory colleague Tyrone Forman have studied racial preferences in homeownership and concluded that “race, per se, shapes how whites and, to a lesser extent, blacks view residential space.”
Their study showed videos to blacks and whites of different neighborhoods, some all-white, some all black, and the racially diverse neighborhoods were majority white neighborhoods (three out of five residents were white). While the technique did not permit finer gradations of how much was too much or not enough, the study drew statistically significant conclusions.
First, once you controlled for social class, whites preferred the all-white neighborhood as significantly more desirable than either the racially diverse or all-black neighborhoods. The mere presence of blacks in a neighborhood made it less appealing to whites. It was not amenities, crime, or schools which were controlled for– but the presence of black people. Whites prefer all-white neighborhoods to homes in racially diverse or all-black neighborhoods.
Second, while blacks were also responsive to the racial composition of the neighborhoods, they were significantly less responsive than whites. Controlling for social class, blacks least preferred the all-white neighborhood. Blacks preferred the racially diverse neighborhood followed by the all-black neighborhood and ranked them well above the all-white neighborhood.
That makes race a likely better explanation than class for why the zip code neighborhoods most likely to take advantage of the mortgage interest deduction overwhelmingly benefit white homeowners. Not because white household incomes are higher than their potential black neighbors, but because whites do not want too many black neighbors – regardless of how much income those potential black neighbors might have. To a lesser extent, blacks prefer not to live in all-white neighborhoods and their choice of racially diverse neighborhoods are not neighborhoods most white homeowners want to live in. Whites as the majority of residential home buyers, set the terms of engagement.
Which brings us to potential solutions. Real tax reform will provide fewer tax breaks for higher income white homeowners who receive their tax subsidies largely because of an accident of birth. As fewer and fewer homeowners who are eligible for the tax break become higher and higher income Americans, can’t we agree that our tax subsidies for homeownership need reform?
Racism has seeped into our tax policies. There is nothing fair or just about that. No progressive income tax system should tolerate anti-black and latino/a provisions like the current configuration of the mortgage interest deduction. Tax reform that roots out such racism is one of the best ways to honor the Fair Housing Act.
Dorothy A. Brown is a Professor of Tax Law at Emory University