Debating Housing Subsidies in the Tax Code -- Against Myself

-- Posted by Neil H. Buchanan

I am in Boston, attending the American Bar Association Tax Section's Fall CLE Meeting. Because this is a joint meeting with the Real Property, Trust & Estate Law Section, the Teaching Tax session is devoted to a debate about the Internal Revenue Code's treatment of home ownership.

When I say "debate," I really mean a debate. The session's organizer, the University of Pittsburgh's Tony Infanti, had a fun idea to organize a formal debate, adapting high school and college debate formats to create a real two-sided debate, complete with cross-examination. What Tony did not know when he invited me to be one of the debaters is that I spent most of my youth (and much of my early adulthood) involved in debate competitions. From October of my 9th Grade year until the Spring of my tenth year out of college, I was a debater or a coach in standard high school "on topic" debate and college "parliamentary debate." (Lincoln-Douglas debate was actually introduced the year after I graduated from high school, and I never coached that style of debate.) I promised not to revert (too much) to my debate geek days -- not, for example, "spreading" (and if you do not know what that means, count your blessings) -- so they let me stay.

Because Professor Infanti wanted to include more people in the debate, and because he had three broad subjects that he wanted us to discuss, we adapted the format to create three-person teams. (The usual formats are either one- or two-person teams.) Unfortunately, one of the negative team members ended up having to withdraw, so we had the idea that I would debate on both sides, as the First Affirmative and then as the Third Negative. Being able to take either side of an issue is one of the skills/pathologies that debate instills in young people, so I did not feel any compunction about contradicting myself. (I argue with myself all the time, after all.) It is, however, unique to have the same person debate on both sides in the same debate. This will be fun.

This was evidently not quite complicated enough, because one of the Affirmative team's debaters became ill on Wednesday and had to withdraw as well. We did not decide to revert to a two-on-two format, however, because of the three subjects that we were planning to debate. So, I am now the First Affirmative, and UC Davis's Dennis Ventry is now both the Second and Third Affirmative. Florida State's Steve Johnson is the First Negative, Chris Christensen (a practicing attorney) is the Second Negative, and I am the Third Negative. Confused? I am sure we will be.

So much for form. What about substance? As regular readers of Dorf on Law know, I am actually in a state of mind where I can comfortably debate both sides of the question. (The formal resolution, by the way, is: "Be it resolved that the United States should make the Internal Revenue Code neutral with respect to home ownership.") Not only have I recently bought a house, after years of suggesting that doing so is not a good idea, but I have also been rethinking my original categorical opposition to subsidies for home ownership.

Interestingly, one of the major reasons I have become less dogmatic about this issue is that Professor Lily Kahng's work has convinced me that there are some serious distributional problems with housing tax policy that are realistically best solved by expanding the tax benefits of home ownership to lower middle-class people (a group that is, not coincidentally in the U.S., disproportionately people of color). After hearing Professor Kahng's arguments in June of this year, I have started to develop some thoughts about the class issue as well.

To make today's debate even more confusing, Professor Kahng is the person who was scheduled to argue on the Affirmative side (that is, against tax subsidies for housing), even though she is the one who made me reconsider my opposition to tax subsidies. Again, this is going to be fun (though probably chaotic).

The three issues that we plan to discuss today are: the (nontaxation of) imputed income from owned housing, the mortgage interest deduction, and the exclusion of income on the sale of a home. Professor Ventry has done some important work arguing against the mortgage interest deduction, and I am looking forward to his comments. Professor Johnson apparently agrees with the Affirmative side on many of today's issues (which means that he will fit right into the mishegas), but he will argue against taxing the imputed income from owned housing.

That latter issue (on which I will take the Affirmative position) is probably the least familiar of the three that we will discuss today. My economics training explains why I find it so seductive, but my legal training (to say nothing of my status as a human being) makes me doubt the economic argument.

The basic idea, in any case, is that a person who owns a house can either live in it or rent it to someone else. If she rents it out, she receives money that must be included in income (offset by appropriate deductions for maintenance, etc.). If she lives in it, she avoids having to pay rent to someone else. So, the house is -- even if she is not actually renting it out -- providing imputed income that would be taxed under a consistently applied income tax system. If a house could be rented out for $2500 per month, for example, the person is receiving $30,000 per year in housing "services," which another person would have to buy using after-tax income. Failing to tax that $30,000 in income is thus a subsidy to home ownership, compared to renting.

As I said above, the economist in me loves this argument. The underlying logic is right. There is no question that there is a horizontal inequity created by the failure to treat owner-occupied housing as generating income. Moreover, the agencies (staffed by economists) that compute the various measures of national income -- most importantly, Gross Domestic Product -- include the estimated value of housing services in their measures, not actual home sales.

And then there is reality. Other than the national freak-out that would inevitably follow any proposal to tax owner-occupied housing, one cringes to imagine how to administer a system that would try to apply this new tax rule fairly. I cannot wait to hear what I say this afternoon when I try to argue in favor of this rule!

If there is blog-worthy material in today's debate (which seems highly likely), I will write a follow-up post next week. In the meantime, there is no need to wish me well. I am guaranteed to be on the winning side this afternoon. And some chump named Buchanan will be one of the losers. I'm gonna clean his clock.