Report: Federal income tax deductions affect affordability of homes--sometimes in negative ways

Sen. Mike Lee (R-Utah), chairman of the Joint Economic Committee (JEC) released a report May 18 on federal tax deductions, spotlighting how they “miss the mark” when it comes to affordability for taxpayers.

Called “Priced Out: Why Federal Tax Deductions Miss the Mark on Family Affordability,” the report notes the expense of homeownership as the single biggest barrier to starting a family.

“However, skyrocketing home prices in recent years have made it difficult for many young adults to take this critical step," JEC Republicans wrote. "Particularly difficult is getting together a down payment, a large and growing challenge for young would-be homeowners. This report argues that tax policy aimed at making homeownership more affordable has increased the wealth of older Americans who own their homes, but by increasing home prices it has made homeownership less attainable for younger families, impeding family formation. 

“The problem is, ultimately, a product of the timing of income and spending over the life cycle. Prior to the COVID-19 epidemic, Americans were earning more than ever—typically enough to cover their housing costs over the long run, and to do so more easily than they did in the past. This will eventually be the case again once the epidemic recedes.”

Even when matters were not impacted this way, there were short- and medium- run issues between when people earn and save their income and when they need it most, which creates a challenge for young people who want to start a family, the report said.

There is an interaction between public policy and these spending/saving cycles throughout one’s lifetime, and sometimes it is unintended – like in itemized deductions on the Schedule A of Form 1040, particularly deductibility of property taxes and mortgage interest, the study said.  Those deductions have a different impact when it comes to taxpayers of different age groups. The JEC Republicans say the deductions can increase the prices of homes on the market.

In looking at the different age groups and homeownership, the JEC noted: 

“A comparison of homeownership between the oldest and most recent years of the survey shows that all age groups younger than 65 were less likely to own their primary residence in 2016 than people of the same age were in 1989. Most of this decline in homeownership came after the 2008-2009 housing crisis. Rather than recovering to pre-crisis norms, homeownership continued to decline for working-age households, all the way through the 2009-2020 expansion.” 

To read the JEC report, visit https://www.jec.senate.gov/public/_cache/files/d883d4cc-f94a-47d2-8993-09a3a825f0cd/1-20-priced-out-report.pdf