Housing Tax and Subsidy Programs' Effectiveness at Closing the Income Inequality Gap

A recent study from the Urban Institute examined the relationships between housing subsidies, the mortgage interest and real estate tax deductions, and income inequality. It used data from the 2013 Current Population Survey (CPS), which the federal government uses for its official measures of income, poverty, and inequality. CPS income data is then adjusted by the Transfer Income Model (TRIM), which measures the value of near-cash benefits, such as food stamps, housing subsidies, and itemized deductions. The study found that housing subsidies to low-income families such as public housing and vouchers reduce income inequality, while the mortgage interest and real estate tax deductions increase it.

According to the study, the ratio of income at different points in the income distribution provides another way to see the equalizing impact of housing subsidies. Without subsidies and the mortgage interest and real estate tax deductions, a household in the top 10 percent of the income distribution has about 9.4 times as much income as a household in the bottom 10 percent. With housing subsidies for low-income families, this income ratio between the highest and lowest earners declines to 8.6 when these housing subsidies are considered part of a household’s income. In contrast, the study found that tax deductions for homeowners have the opposite effect on inequality. When mortgage interest deduction and real estate tax deductions are considered along with direct housing subsidies, the ratio is 8.8.

The study also reported the impact of housing subsidies and tax deductions for homeowners on the Gini coefficient, which is a commonly used measure of inequality that ranges in value from 0 to 1. Zero indicates that every household has the same income or perfect equality, and 1 indicates that one household has all of the income or maximum inequality. The estimated Gini coefficient in 2012 was 0.424, without taking housing subsidies or the tax deductions into account. It declined to 0.418 when housing subsidies were added to income. The Gini coefficient rose to 0.421 when the benefits of the mortgage interest and real estate tax deductions were then included.

Overall, the authors of the study conclude that the positive impact of direct housing subsidies outweighs the negative impact of the mortgage interest and real estate tax deductions on income inequality, and suggest that additional investment in housing subsidies for the lowest income households can have a broad impact on reducing inequality.