Democratic Presidential candidate Joe Biden has proposed a first-time homebuyer (or “down payment”) tax credit of up to $15,000. While details are sparse, the idea of a tax credit to help new homebuyers with their down payment makes good sense and is a significant improvement over today’s primary subsidy for homeowners—the mortgage interest deduction (MID). A version of the Biden tax credit proposal has been estimated by the Tax Policy Center to cost roughly $25 billion annually.
A tax credit for first-time homebuyers focuses on homeownership rather than the accumulation of mortgage debt. Such a credit would target subsidies to those who don’t yet own a home, including the young, who have struggled to build wealth. It also would benefit Blacks and Hispanics, who respectively have only one-eighth and one-fifth the average wealth of Whites.
I described many of the benefits of a homebuyer credit in a report I coauthored with Amanda Eng and Benjamin Harris (who currently is an economic adviser to Biden). In a future column, I’ll discuss some of the difficult design issues that a first-time homebuyer tax credit raises.
While the Biden campaign does not provide many details about the proposed tax credit, TPC’s analysis was based on a temporary first-time homebuyer’s credit that was available from 2008 to 2010. That prior tax credit generally equaled 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing a joint return. TPC assumed that the proposed Biden $15,000 credit would have a similar structure, but with a credit rate set at 20 percent.
The basic rationale for any homeowner’s subsidy rests on a few basic notions, such as the likelihood that people take better care of their own property than someone else’s, the stability that home ownership gives to a community, and the wealth reserves homeownership provides to families for retirement, emergencies, and other purposes. Those concerned about wealth inequality and its relationship to opportunity recognize that home equity and retirement assets are the two principal forms of wealth for most households. Owner-occupied homes are the primary asset for those with less-than-median wealth.
Even if one does not accept these benefits of homeownership, a first-time homebuyer’s credit still is a superior incentive than the mortgage interest tax deduction (MID) or almost any subsidy related to the amount of interest paid.
A first-time homebuyer’s tax credit also directly subsidizes the acquisition of a home, in contrast to the MID that often supports maintaining or increasing mortgage debt. Consider someone who simply refinances a conventional 30-year mortgage after 10 years with a new 30-year loan. By stretching out the payment period for 10 more years, the refinancing reduces the amount of the homeowner’s net equity for every succeeding year. Similarly, imagine someone who sells a $400,000 house with a $200,000 mortgage and $200,000 of equity and buys another $400,000 house. The MID is an incentive to make a relatively small down payment, say $80,000, and take out a new mortgage of $320,000. This step reduces home equity by $120,000 and perhaps leads the homeowner to spend that extra cash on a higher level of consumption.
Finally, properly capped, a homebuyer’s credit emphasizes homeownership, not a home’s size. No one buying a house worth more than $75,000 under the 2008-10 temporary tax credit got more of a subsidy than anyone else. Per dollar of tax subsidy, a first-time homebuyer’s credit does far more to encourage ownership than the current home mortgage interest deduction, which today is available for loans up to $750,000.
Under the 2017 Tax Cut and Jobs Act, the Tax Policy Center estimated that the number of itemizers dropped from about 26 percent of all tax households to about 11 percent with very few in the first three quintiles (poorer 60 percent) of the income distribution. For the vast majority of first-time homebuyers, a Biden-like credit would be a far more effective and far more evenly distributed tax subsidy than today’s mortgage interest deduction.
