Good for Wealthy Homeowners, Bad for Education

Like apple pie and sending your kids to college, owning one's own home has become part of the definition of the American dream. Federal, state and local governments provide billions of dollars of subsidies for home ownership every year, and politicians routinely offer plans to promote greater homeownership.

Yet Americans' romance with homeownership is more dysfunctional than we may realize. Economists have argued our fixation on home ownership leads Americans to concentrate too much of their wealth in a single, depreciating asset and slows economic recoveries by lowering workers' mobility. Less recognized, however, are the ways that public policies designed to promote homeownership may actually undermine efforts to improve public education.

Analysts have noted that our primary public policy tool for homeownership – the mortgage interest deduction – actually exacerbates economic inequality rather than promoting opportunity. More than three-quarters of the benefits go to households earning more than $100,000, and nearly half of homeowners with mortgages get no benefits at all.

Rather than making houses more affordable for moderate and low-income families, the mortgage interest deduction has simply made it easier for people to buy more expensive houses. From 1973 to 2013, the size of the average American home rose more than 60 percent, even as families grew smaller. Bigger homes consume both more energy, harming the environment, and more of the typical family's resources – part of the reason that middle class families feel increasingly strapped. The median home sale price in January 2010 was 4.41 times median annual earnings that year, up from 3.15 in 1975.

The mortgage deduction also contributes to inequitable access and outcomes in public education. Income segregation – both in housing and in schools – has risen significantly in the past 25 years. New research from University of Southern California sociologist Ann Owens shows that this increase in residential segregation has been driven almost entirely by wealthy parents opting to purchase homes in expensive neighborhoods with good schools.

As wealthy families bid up the cost of homes near the best schools, those same neighborhoods and schools become increasingly out of reach for moderate- and lower-income families, concentrating them in communities with poorer schools and higher concentrations of poverty. Owens' research finds that virtually all the increase in residential income segregation has been driven by families without kids – childless households are no less economically integrated than in the past, but children live in far greater economic and racial segregation than the population at large.

Obviously a variety of factors, including the growth of income inequality and residential zoning policies that make it increasingly difficult to build affordable housing in wealthier areas, contribute to these factors. But the mortgage interest deduction also plays a role: By enhancing wealthy families' purchasing power, it allows them to bid up housing prices even further. And because the mortgage interest deduction provides greater value to higher-income families than to those with more modest incomes, it amplifies, rather than reducing, disparities in families ability to purchase homes in neighborhoods with good schools.

By disproportionately subsidizing the cost of homeownership in high-wealth, high-costs communities, federal tax policies are also subsidizing inequities in local spending on education. Curtailing or reducing these subsidies would likely lead to a fall in housing prices, resulting in significant short-term pain in states whose education finance systems rely heavily on local property taxes (counter to popular belief, not all do), as well as districts that raise significant additional local funding for schools. Lags in assessment adjustments would mitigate some of this pain in the immediate term, however. And long term, drops in housing values could encourage more states and districts to move away from local property taxes to more equitable systems of school financing.

The biggest way that the mortgage interest deduction undermines equity isn't just the incentives it creates, however, but the fact that it reduces resources available for other government spending that promotes equity. Budget experts estimate that the mortgage interest deduction costs the U.S. Treasury some $70 billion annually. That's enough money to provide free, high-quality universal preschool to every single 3- and 4-year-old in the United States, or, combined with existing spending on early childhood programs, to create a system of universal, high-quality, affordable child care for all infants, toddlers and preschoolers. Converting the mortgage deduction to a 15 percent credit and capping its value, as the President's Advisory Panel on Tax Reform proposed, would yield $388 billion over seven years. Split that revenue between early childhood and deficit reduction, and we could still double the number of children getting quality preschool.

And if early childhood isn't your jam, there are other investments in educational equity – from expanding quality charter schools; to improving teacher preparation, support and compensation; to equalizing funding for high-poverty schools – that could significantly enhance equity for disadvantaged youngsters, opportunity across the economic spectrum and educational outcomes for all kids.

The mortgage interest deduction is often viewed as helping American families. But it's actually quite inefficient and poorly targeted for this purpose. Direct support for programs that help parents meet the costs of housing, educating and caring for their children – whether in the first few years of life or through elementary, secondary and college education – would do much more to support American families, particularly those with low- and moderate-incomes whose children would most benefit from increased opportunity.

I'm not naïve enough to think that these proposals are going anywhere soon. Policymakers loathe the thought of taking away a popular "middle class" tax benefit (even though it mostly goes to the wealthy) or being blamed for decreasing property values. I'm also aware that, as a homeowner myself, I'm arguing against my own interest here to the tune of thousands of dollars a year. Yet as our nation faces both increasingly complex challenges and a more constrained fiscal outlook moving forward, enabling the kinds of investments needed to support future growth and opportunity requires making hard choices. With American home prices again on the rise – and nearing stratospheric levels in some coastal cities – there's never been a better time to think about reforming the mortgage interest deduction.