Secretary of State Shemia Fagan on Tuesday, March 8, 2022. (Ron Cooper/Oregon Capital Chronicle)
Oregon government loses more than $500 million each year to a housing tax break that mostly helps wealthy white homeowners in urban areas, state auditors said Wednesday.
The mortgage interest deduction is the state’s largest housing subsidy, said Secretary of State Shemia Fagan. She contrasted that state tax policy to the scrutiny that follows every dollar the state spends to build affordable housing, shelter people without homes or keep seniors from losing their homes.
“Meanwhile, for over 100 years, billions of dollars have just walked out the back door with no questions asked because the benefits go primarily to people with power,” Fagan said. “I can’t think of a worse example of waste and systemic inequities than that.”
Homeowners who itemize their state tax returns can deduct the interest they pay for an entire year on their mortgage, paying less in income taxes.
A report from the state Audits Division released Wednesday found no clear reason why Oregon passed its mortgage interest deduction in 1923, or why the federal government allowed deductions for mortgage interest 10 years earlier. Conventional wisdom says it promotes homeownership, but nothing in the legislative or congressional record indicates that that was lawmakers’ intent, the report said.
Chris Bonner, a Portland Realtor who joined Fagan at a press conference announcing the audit results, said the audit confirmed something she’s long suspected: the mortgage interest deduction doesn’t help more people own homes. Over more than 30 years selling houses, she said she’s watched thousands of buyers make decisions about whether and when to buy, and she’s seen many people who want to buy homes but can’t do so.
She talks weekly with people struggling to save for a down payment because they don’t come from generational wealth with parents giving them money or they can’t qualify for a mortgage because of student loans or medical debt, she said.
“Even if they jump these hurdles, they end up having a hard time being competitive in this incredibly crazy environment of rapidly rising home prices,” Bonner said. “The money Oregon spends on this tax break does nothing to address these issues.”
Auditors found that the biggest benefits go to the richest Oregonians. The top 1% of homeowners, who earn more than $458,700 annually, receive an average mortgage interest deduction of $1,138. The average deduction across all income ranges is $227, and it’s $120 for those in the middle of the income distribution, who make between $32,900 and $57,100 annually.
Oregon doesn’t collect information about race or identity on tax returns. However, auditors determined that most benefits flow to people who are white or Asian and not Hispanic, based on the demographics of Oregonians who own homes and make more than $100,000 annually.
Nearly 64% of white Oregonians and 59% of Asian Oregonians own homes, compared to just 31% of Black Oregonians, 41% of Hispanic Oregonians and 45% of Native Americans.
Most benefits from the mortgage interest deduction go to households that earn more than $100,000 annually. More than a quarter of white households and more than a third of Asian households earn that much, but only 14% of Native households and 15% of Black and Hispanic households make more than $100,000.
Marcus Mundy, executive director of the Coalition of Communities of Color, said the audit should spur lawmakers to change tax policy. Legislators have introduced several proposals over the past few years to reform the mortgage interest deduction, including proposals to limit it to homeowners who earn less than a certain amount and redirect the money to affordable housing programs. None of those bills passed.
“Oregon, everybody knows what the problem is,” Mundy said. “The problem isn’t finding it. The problem is who wants to fight for equity and fairness and make the necessary changes.”
Housing insecurity is personal for Fagan. She recounted a road trip from The Dalles to Portland with her older brother in 1997 to visit their estranged mother, who battled heroin addiction and was homeless for most of Fagan’s childhood.
That spring, Fagan and her brother received a letter from their mom with an address asking them to visit her. They pulled up to a beautiful Victorian-style house with a big wraparound porch.
Her mother dropped to all fours and crawled under the porch, showing them where she kept her sleeping bag and a small box of possessions.
Fagan’s mother eventually got back on her feet. By the time she died in 2014, she hadn’t used drugs for nearly six years and she owned a 900-square foot bungalow in Umatilla – reaching what the minister who conducted her funeral described as an “ordinary life” after decades of struggling.
Many Oregon families face the same struggles today that Fagan’s family faced 30 years ago, she said. She hopes the audit will cause lawmakers to examine the mortgage interest deduction.
“If the purpose is to get Oregonians housed and keep people in their home, we certainly encourage the Legislature to evaluate policies that could maybe do that more effectively with the state’s largest housing subsidy than the way that that money is currently being wasted,” she said.
Not all Oregon taxpayers who are qualified for the mortgage interest deduction take it. The state’s standard deduction ranges from $2,350 to $4,700 depending on tax status, and itemized deductions including mortgage interest, charitable contributions, medical expenses and property taxes have to exceed the standard deduction if taxpayers wish to itemize their taxes.
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