Some Democrats in the Oregon Legislature want their colleagues to look closely at who benefits from the state’s largest housing subsidy and consider scaling it back.
Five Democrats in the state Senate and House proposed various changes to the mortgage interest deduction this session to pare back the tax break, such as eliminating the state’s version of it for second homes and for primary homes of people with more than $250,000 in federal adjusted gross income.
“It is a racial justice issue,” said Rep. Khanh Pham, D-Portland, a chief sponsor of three bills on the mortgage interest deduction. “There is a huge racial disparity in homeownership.”
Homeownership among white Oregonians stood at 65% in 2017, while the rate for Latino residents was 43%, and the rate for Black Oregonians was 35%, according to a U.S. Census Bureau estimate.
Lawmakers have pitched the idea of limiting the state mortgage interest deduction for well-off Oregonians in previous legislative sessions only to see it quickly hit a wall of opposition, and some supporters concede the most they might achieve this year is to keep the discussion alive.
Still, lawmakers’ continued interest in trimming the popular tax write-off was enough to prompt the Oregon Association of Realtors to send out mailers in the Portland area, urging people to contact their representatives and tell them to “protect the dream of homeownership.”
“Housing costs in Oregon are out of control,” the Realtors wrote. “Raising the tax burden on homeowners during a global pandemic will only make it harder to afford a home … 70% of homeowners will utilize the (mortgage interest deduction) at some point. It is one of the few deductions available to working- and middle-class families, many of whom are struggling right now due to the pandemic.”
The Realtors did not mention second homes or explain that the only proposal still under consideration at this point would only phase out the tax break for people earning over $200,000 in federal adjusted gross income and eliminate it completely for people with more than $250,000 in income. The top 3% of Oregon tax filers had incomes of at least $250,000, according to the latest data available from the state Department of Revenue.
The homeownership tax break is expected to reduce state income tax revenues by $986 million in the current budget that ends in June and $1.1 billion in the 2021-2023 budget cycle, according to Oregon’s latest tax expenditure report.
In House District 46 in southeast Portland, the Realtors’ mailer urged residents to contact Pham, a chief sponsor of three bills to scale back the mortgage tax break. However, by the time people received the mailer, it was clear both of the proposals it mentioned — House Bill 2838 and House Bill 2578 — were dead because one missed a crucial deadline and the other never even received a hearing.
Pham said in an interview that by attempting to raise voters’ concerns about dead bills, Realtors seemed to be sending the message “that we shouldn’t even be introducing it.”
The only proposal still alive is Senate Bill 852, which would eliminate the state mortgage deduction for second homes and phase it out on first homes for households with incomes above $200,000 to help moderate- and low-income people buy a first home or otherwise afford housing. It was scheduled for a public hearing at 1 p.m. Thursday at the Senate Committee on Housing and Development and a possible committee vote April 8.
It would direct all new tax revenue that would result from limiting the mortgage interest deduction to a new “Oregon Housing Opportunity Account,” which the state housing agency could spend on “loans, grants, and other housing support, particularly for racial groups with low rates of homeownership and other groups experiencing housing barriers and instability,” according to a legislative summary of the bill.
“This bill would free up $200 million to invest in desperately needed housing … by scaling back the tax break for the richest 5% of Oregonians and people who can afford two homes,” Pham said.
Sen. Kayse Jama, also a Portland Democrat, is a chief sponsor of Senate Bill 852. He said in an emailed statement that the deduction “is disproportionately awarded to people who do not rely on this deduction to own a home. It exemplifies inequity in our tax system and serves to further the homeownership gap between BIPOC communities and their white counterparts.”
Senate Bill 852 “is smart policy” that “redirects funds to people who truly need housing assistance, including to low-income Oregonians who own their home but have trouble maintaining it and to low-income Oregonians trying to buy their starter home. Instead of subsidizing those currently housed, some money could also go to preventing homelessness for certain populations, which I would support.”
Shaun Jillions, a lobbyist for the Oregon Association of Realtors, said the fact that Senate Bill 852 is scheduled for a possible committee vote means it is a serious threat, although it would next move to the Senate Committee on Finance and Revenue so Realtors would have another shot at killing the bill before any possibility of a floor vote. Jillions did not answer a question about how much the Realtors spent on the mailers to lawmakers’ constituents.
Jillions said the National Association of Realtors has found that people who own second homes primarily rely on the mortgage interest deduction so they can afford “fishing cabins in small tourist towns and that’s really how we look at it in Oregon. You have a variety of areas in the state that were promised tourism when their natural resource economies cratered, Bend and the coast.”
Jillions said the mortgage interest deduction is achieving policymakers’ goal of increasing homeownership, and the high cost of homes in Oregon means that even households that earn hundreds of thousands of dollars can have a hard time affording a home along with student loans and other debt.
The popularity of the mortgage interest deduction, including among people who don’t claim it or even own homes, makes it challenging for lawmakers to pursue any changes.
Economists are less enthusiastic about the mortgage interest deduction, because it encourages people to take out larger mortgages and is regressive in that upper income earners benefit the most. Some economists have found it can reduce homeownership rates for low and middle-income people by driving up prices, according to the Federal Reserve Bank of St. Louis.
Katrina Holland, executive director of the homeless services nonprofit JOIN, is a member of the group Reimagine Oregon which she and other Black community leaders, activists and organizations formed last year to push elected leaders to address structural racism and injustice amid national protests following the Minneapolis police killing of George Floyd.
Holland, who has been following discussions of reducing the mortgage interest deduction for years, said she is “excited to at least see the conversation being brought to the table because for a long time that wasn’t even allowed.” Legislators, community members and housing advocates who supported an overhaul told her “the Realtors are going to bring a ballot measure against it and because the polling shows it’s not going to work, we shouldn’t pursue it.”
Since a homeowner’s tax break increases with the size of the loan, it’s skewed to benefit the most well-off, Holland said. And Oregon’s history of racist restrictions on homeownership — such as deed restrictions to only allow white people to own or occupy homes in a neighborhood — and redlining that prevented many Black, Indigenous and people of color from benefiting from the mortgage interest tax break.
“Keep the mortgage interest deduction but make it for primary residences,” Holland said. “And the money that we save from (changes), let’s invest it in Black and brown homeownership opportunity that has systemically been denied us for years.”
Homeowners could deduct interest on home loans up to $1 million on their state and federal income taxes until December 2017, when the Republican tax overhaul temporarily capped the debt eligible for the interest deduction at $750,000. The limit is set to go back to $1 million in 2026.
Federal mortgage interest deductions aren’t as important to homeowners as they used to be, with the standard federal deduction having temporarily skyrocketed beginning in tax year 2018. Less than half as many filers claimed the mortgage deduction on their federal returns after that change, officials said.
But the deduction is still a big deal to Oregon taxpayers, according to economist Kyle Easton of the Legislative Revenue Office. Easton said the percentage of people filing itemized Oregon tax returns has remained steady and state tax analysists have predicted the dollar amount of Oregonians’ mortgage tax break claims will increase over the next two years.