Written by: Eugene Steuerle
In his State of the Union address, President Biden proposed a first-time homebuyer tax credit. Senators Sheldon Whitehouse (D-CA) and Martin Heinrich (D-NM) and Representatives Jimmy Panetta (D-CA), and Earl Blumenauer (OR) have made a similar proposal. Properly designed, these credits could make homeownership much more widespread. But not as proposed.
My colleague Howard Gleckman has already questioned the President’s proposal to make the credit only temporary while failing to replace the home mortgage interest deduction. I focus here on the structure required for administering a more permanent credit and ensuring that it serves the goal of wealth-building over time.
Homeownership plays a vital role in the accumulation and distribution of wealth in society. Households in the United States hold about $45 trillion in owner-occupied housing assets, partially offset by about $13 trillion in mortgages. Over one-quarter of all households’ assets and one-fifth of their net equity resides in homes. Even these statistics belie the importance of homes for much of the population. Homes, even more than retirement assets, dominate the total wealthholding of all households with average or below average wealth or income. Except in the wealthier classes, those without homes tend to accumulate far lower levels of total wealth.
I bear some responsibility for the revival of this topic. In 2013, Ben Harris, Amanda Eng, and I published a paper on homeownership tax incentives, where we concluded that a first-time homebuyer tax credit provided a far superior tax incentive than the mortgage interest deduction. Dr. Harris later became the coordinator of Joe Biden’s 2020 campaign proposals and later Assistant Secretary of the Treasury for Economic Policy. Biden proposed a first-time homebuyer credit in the campaign, but President Biden did not further promote it until his recent 2025 fiscal year budget proposals. My note here reflects some conclusions from that paper and some we did not fully address.
Among its several problems, the home mortgage interest deduction encourages debt, not just home purchases. Consider all the advertisements to pay off mortgages more slowly or take out larger mortgages even when moving to another house in the same price range. A higher mortgage also allows some taxpayers to deduct interest on a mortgage while deferring paying tax on earnings within retirement accounts.
Many economists favor deductions over credits because of the latter’s greater progressivity if tax rates remain fixed. Yet replacing a home mortgage interest deduction with a mortgage interest credit would still encourage debt, not equity. In fact, for households in low tax brackets—or if a “refundable” credit applies to those with no tax liability—the credit rate would exceed the taxpayer’s marginal tax rate. Borrow at 5 percent and put the money in a bank account at 5 percent, and the homeowner makes money. For lower-income households, an interest credit would subsidize debt and discourage mortgage payments even more than an interest deduction.
A first-time homebuyer credit solves this problem by subsidizing asset ownership, not debt. However, as proposed by the president and in a recent Congressional proposal, it faces two severe limitations.
First, any viable system requires a permanent set of reporting mechanisms. Reports must be issued by real estate agents, lawyers, banks, or others involved in property transfers. IRS, in turn, needs to establish a system for tracking taxpayers who garner such credits to ensure they abide by various rules. For instance, it must limit any subsidy for those who immediately sell the property after a purchase.
It must also start tracking who is “first-time” in using a subsidy. Congress must establish rules for joint returns and ownership, which the IRS must enforce in divorce, death, and remarriage cases. A permanent credit might also make available any recaptured amount for someone returning to homeownership.
All of this is complex. Perhaps the government could be recorded as a gradually declining and partial equity owner of the property over the period in which the owner cannot resell the property without paying back some or all of the credit received. In the absence of such a mechanism, almost any credit will be subject to various forms of noncompliance, as noted by Gleckman when recounting abuses of the credit put in place during the Great Recession.
Second, any incentive should encourage the retention of savings and the buildup of equity, not just asset purchases. Retirement saving incentives, for instance, defer taxation of earnings for as long as the taxpayer accumulates earnings in a retirement account. By contrast, the Congressional proposal noted above would grant a $3,750 per year subsidy for the four-year homeowner but only $500 per year for the thirty-year homeowner.
At this point, you might be asking whether a subsidy for homeownership is worth the trouble. However, if you care about the distribution of wealth, then homeownership is far too important to be neglected. Our overall federal system of incentives already discourages moderate-income taxpayers from homeownership, such as through rental subsidies that the renter cannot convert to ownership.
Also—and this gets a bit wonky, though crucial—the income tax system does not and never will tax the returns to equity ownership. Even without a home mortgage interest deduction, higher-income individuals benefit significantly from having equity in a home rather than the same amount of money in a taxable savings or investment account. Lower-income individuals, by contrast, gain little or no tax advantage from equity ownership if they are in a low or zero tax bracket. This incentive alone drives up the price of land and reinforces a more unequal distribution of wealth in society.
In sum, if Congress believes in the value of homeownership and doesn’t want to subsidize it only for those with higher incomes, it needs to provide an alternative, such as a first-time homebuyer tax credit. It then must tackle how it can be administered in today’s multitrillion-dollar housing market and ensure the incentive lasts the long periods required for significant wealth accumulation.
Related: The Giveaway and Takeaway Sides of the Government’s Budget