When I started investigating the Pentagon at age 24, I had very little military knowledge and no career military men in my family. I had cultivated an underground network of sources in the Pentagon who wanted me to be their front for information on weapons that didn’t work and overrun weapons programs. I was trained as a journalist and was willing to tackle complicated issues such as what makes a good tank, and to pick apart byzantine military procurement schemes to overcharge the government. But at times, I felt that my lack of experience in the military was a handicap. However, my sources said that it actually helped because I came to the topic with fresh eyes and did not buy into any preordained narrative. They were right, and because I stuck to facts and documents, I gave the Pentagon a run for its money.
I read the senior thesis of Ben Kittelson, who graduated from Willamette University in Oregon this year. Kittelson took an in-depth look at our federal housing programs and pointed out some real problems with where most of the money really goes. You can read his full thesis here. I have edited his thesis of over 17,000 words to produce a small but fascinating part of his work, which illustrates how some federal programs can start out right but then turn upside down with regard to who they are really helping and where the majority of the money is going. Although Kittelson wrote this thesis during the last school year, it is especially timely now, after last week saw Wisconsin Republican Congressman Paul Ryan chosen as Mitt Romney’s vice presidential candidate, and in light of Ryan and Romney’s emphasis on their position that government should be used to service the wealth of the rich of our country, and that then, some of that money will trickle down to the poor – who are somehow undeserving of federal help.
Kittelson has looked at this topic with fresh eyes and interesting perspectives, and I believe he will challenge your long-held notions of how the federal government tries to help the millions of Americans who need help finding safe and affordable housing. Kittelson graduated from Willamette with a double major in politics and economics, and will start this fall at Portland State University to get his Masters in Public Administration. He is currently an intern for the mayor’s office in the city of Beaverton, Oregon. He aims to do policy work at the local government level for either a state or city government. (Full disclosure: Kittelson is a friend of my son, who also graduated this spring from Willamette University.)
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Section 8 Waitlists Don’t Have to Be a Mile Long: Federal Housing Policy Should Stop Favoring Wealthier Homeowners
Imagine an overwhelmingly regressive welfare program, taking money from low- and moderate- income individuals and disproportionately benefiting people with incomes over $100,000. This policy would allow the rich and upper-middle classes to consume more while leaving working-class and poverty-stricken citizens without the aid they desperately need. Imagine that this same policy allows for inefficient resource use and causes stress on urban infrastructure. Imagining a policy like this is difficult and almost unfathomable because most Americans, when they think of welfare, think of policies that help and aid the poor in order to give them a more level playing field. In the very least, Americans think of policies that aim to change poor peoples’ behaviors. Even the most conservative pundit would find a welfare policy that is so obviously skewed to the wealthy to be strange. However, these seemingly contradictory principles are all embodied in one of the United States’ most expensive welfare policies: federal housing policy.
Most people do not recognize the different policies that make America’s approach to housing so strange. Either they see it as the free market at work, or they do not see it as welfare. This mindset is one of the most intriguing features of housing policy and the welfare state in general. America is very unique in that many of the policies of the welfare state are “submerged,” or hidden from public view. These hidden policies maintain the illusion that the United States has a small welfare state, while still allowing for aid to flow from the government to targeted groups.
The United States also uses a myriad of policy tools to make up the welfare state, while other countries are more likely to use explicit means like cash transfers and direct national spending. Seeing the many policy tools, the question then becomes, why does the United States have this kind of housing policy? This is an interesting question, due to the ways in which US housing policy benefits citizens who do not need the assistance, and the ways in which the policy is so different than what is usually thought of as welfare. I argue that United States housing policy has been subject to increasing returns, and historical decisions have set the United States on a path that has been difficult to alter. This path has reinforced homeownership preference, broader American attitudes about the welfare state and the role of interest groups in preserving the status quo.
When the majority of Americans think of welfare, they think of cash transfers that aid low-income citizens. In reality, this is only one specific program, Temporary Assistance to Needy Families (TANF), which exists in conjunction with a variety of other policies that make up the welfare state. Scholars and students of public policy tend to take a broader approach in defining welfare that includes all direct government assistance to citizens. This would then include in-kind benefits such as food stamps, housing vouchers, Medicaid and Medicare. These explicit means of government aid represent only a few ways that the government can regulate society, aid citizens or encourage certain behaviors. A much broader approach to welfare is used by authors like Christopher Howard and Suzanne Mettler. [See full thesis, which is hyperlinked to in the introduction of this article, for references for all quotes and studies referenced.] Both of these authors include other government policies, such as loan guarantees, tax expenditures and social regulation, in the welfare state.
I believe that this broad definition of welfare is the most accurate representation of America’s welfare state. This is easily seen in United States housing policy because, within that umbrella of housing, there are a variety of policy tools used to aid citizens and encourage certain behavior. The types of policy tools are: direct assistance, loan guarantees, tax expenditures related to housing and social regulation like zoning. This inclusive definition of welfare creates a more accurate understanding of the United States welfare state. This is important since it is usually viewed as, “a semi-welfare state, a welfare state laggard, a residual welfare state, an incomplete welfare state, and similar terms denoting inadequacy,” as Howard writes in “The Welfare State Nobody Knows.” I am not looking at the entire welfare state, but instead, just at the housing sector of the welfare state.
There are many reasons to focus on the welfare policies surrounding housing. First of all, housing is a basic need that must be met before any person can achieve his or her full potential or even participate in society. Housing has long been important in America; it has been associated with the success of the economy and the middle-class American dream. Lastly, housing involves a variety of policy tools in the same way the welfare state more generally does. By analyzing housing policy and the reasons it looks the way it does, I can then make broader generalizations about the American welfare state.
Housing policy is also important to investigate because of recent events in the economy. The housing bubble that slowly built up over a number of years burst in 2008, and we are still dealing with the consequences. Many people in the industry did not see this coming, or if they did, chose to ignore it. What became obvious after the bubble burst is that a focus on homeownership does not always have positive benefits. A single approach to housing through homeownership is not to the benefit of society as a whole, nor the best policy for every individual. The crash and subsequent “Great Recession” begs us to ask whether we should continue with the current housing policy or reassess in order to avoid a mistake like this in the future.
One important concept to understand is how tax expenditures are the same as direct government spending. Most people do not know what tax expenditures are, and few view them as the same as direct expenditures. The Joint Committee on Taxation defines tax expenditures as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability” (Joint Committee on Tax Expenditures 2010-14). This just means that any law allowing an individual to pay a lower or different rate of taxes from the normal tax law is seen as an expenditure. So, being able to write off the interest on a home mortgage, excluding retirement benefits from taxable income or writing off local property taxes from your federal total would be a tax expenditure. The committee also states that tax expenditures can be considered the same as direct spending programs, and that the two can be seen as alternative ways to accomplish the same goal (Joint Committee on Tax expenditures 2010-14). Thinking about tax expenditures in this way, instead of seeing them as loopholes or the normal operation of tax policy, opens our eyes to a broader understanding of the government’s role in our everyday lives and a more comprehensive understanding of the welfare state.
Section 8 vouchers were created in 1974 in response to the poor living conditions in public housing projects. Developments had become associated with high rates of crime, concentrated poverty and high drug use. Section 8 vouchers give assistance to low-income citizens, but instead of being stuck in a housing project, recipients can choose where they want to live. The program, currently called the Housing Choice Voucher Program, allows recipients to pay only 30 percent of their income towards rent and the voucher pays for the difference between that and the fair market rent of the unit. This program has changed over time as improvements to the mobility of renters were created and more autonomy was given to the tenants rather than to landlords. The program serves a little over 5 million people living in 2,209,675 housing units (HUD Picture of Subsidized Households, 2008). This has been the most effective program for aiding low-income renters, but it is underfunded: on average, recipients spend 26 months waiting to enroll in the program (HUD Picture of Subsidized Households, 2008). These numbers are probably even higher because some cities close their waiting lists for years at a time. Citizens can go for years without assistance despite considerable need.
What is most alarming and important about these programs is the number of renters who go unaided despite a desperate need. Every two years, the department of Housing and Urban Development (HUD) makes a report to Congress on “Worst Case Housing Needs.” These worst case needs are defined as very low-income renters with incomes below 50 percent of the area’s median income who did not receive government housing assistance and who paid more than one-half of their income for rent or lived in severely inadequate conditions, or both of these things (HUD, Worst Case Housing Needs 2009).
The data from 2009 was reported to Congress in 2011 and painted a startling picture. There were over 7 million renters who experienced worst-case housing needs in 2009; this was a 20 percent jump from 2007, when only 5.91 million renters experienced worst-case level needs (HUD, Worst Case Housing Needs 2009). These are renters who get absolutely no aid and yet need it badly. Also, note that worst-case housing needs are people paying more than one-half of their income to rent; this is a different standard than what most programs use to decide affordability.Most programs, notably Section 8, use the standard of spending 30 percent of income on rent as affordable. This is far below 50 percent and leads to the conclusion that even more people than the amount with worst-case needs could qualify for federal assistance but do not receive it. In fact, there were 17.12 million very-low-income renters in 2009 (HUD, Worst Case Housing Needs 2009). That is over two times the number of renters with worst case needs. Just the fact that 7.10 million renters are in dire need of assistance, yet receive none, is shocking, especially compared to other housing policies like the Home Mortgage Interest Deduction, which is much more expensive than Section 8 and is available to every homeowner in the nation. The gap between need and assistance is one of the most intriguing and shocking features of United States housing policy.
Tax Expenditures: Home Mortgage Interest Deduction
The golden goose of housing policy, the home-mortgage-interest deduction (HMID), is the oldest housing policy and the most expensive. Reform of the deduction has been proposed numerous times over its lifetime but has remained virtually unchanged. The HMID was implemented as a part of the legislation that created the personal income tax in 1913. The policy was not originally meant as a housing policy. The interest on mortgages was deducted in the same way that interest from any form of debt was. This exemption of consumer debt from taxation was “a tradition that dated back to the Civil War period” (Mettler 2011). Though other forms of interest write-offs have been eliminated, the HMID has not. This is partially due to the lobbying groups that emerged to fight for the deduction, specifically the National Association of Real Estate Boards (NAREB) and the National Association of Home Builders (NAHB) (Howard1997). Another reason the HMID has so much staying power is because of the perception that it encourages homeownership.
The HMID works by deducting interest on a home loan from a person’s total income so that they can generate a lower level of taxable income (Howard 1997). Any interest paid on the mortgage does not count toward the total income that is taxed. This means that larger benefits can be received in two ways, either by having a larger mortgage, which means more interest can be excluded, or by being in a higher income tax bracket. If two citizens in different income brackets exclude the same amount of income, then the person in the higher income tax bracket will receive a larger benefit, because the income excluded would have been taxed at a higher rate. So, a $100 exclusion of income means a $15 benefit to a person being taxed at a 15-percent rate, and it means a $30 benefit to someone being taxed at a 30-percent rate. Thus, in two ways, higher-income earners are disproportionately benefitted by the HMID. Higher-income earners tend to have larger mortgages and are in the higher income tax brackets.
Also, the HMID requires recipients to itemize their deductions, which low-income earners do not do – they usually just take the standard tax deduction. The percentage of lower-income taxpayers who take the HMID is much lower than the homeownership rate: in 2007, 60 percent of households with incomes between $30,000 and $40,000 owned their own home, but only 11 percent took the HMID (Schwartz 2010). This skew toward upper earners is shown in the Joint Committee on Taxation’s data on tax expenditures. It shows that citizens who earned more than $100,000 a year totaled 40 percent of tax returns but received 69.2 percent of the value of all deductions (Joint Committee on Taxation 2010-2014).
There are other homeowner tax deductions that the government gives and, though they are not as big as the HMID, they are significant. Homeowners can deduct the state property taxes they pay from their federal tax total, which cost about $15 billion in 2010 (Joint Committee on Taxation 2010-2014). The exclusion of the capital gains from selling a home also cost the treasury another $15 billion in 2010 (Joint Committee on Taxation 2010-2014). With the cost of the HMID at $90.8 billion for 2010, that is a total of $120.8 billion in tax expenditures on homeowners (Joint Committee on Taxation 2010-2014). This is a huge cost to the Treasury and dwarfs the operating budget of HUD, yet the majority of this benefit is going towards upper- middle class and upper-class citizens. As researcher John Landis noted, “the current distribution of homeownership subsidies disproportionately favors those who would have the least trouble attaining homeownership in the absence of government subsidies” (Landis 2010). This issue is striking, since one common rationale for these tax deductions is to encourage homeownership.
Section 8 Vouchers:
|Tax Expenditure||Current Homeowners|
|FHA Loan Guarantee:||$246 billion||Loan Guarantee||Potential and Current Homeowners|
|Local Zoning Laws
Source: Office of Management and Budget 2012; Joint Committee on Taxation 2010-2014; Glaeser 2003; Glaeser 2008.
After looking at the different policies that constitute housing policy in the United States, two major themes emerged: there is an obvious favoring of homeownership over rental housing, and higher-income citizens receive more benefits than lower- and moderate-income citizens. This second theme is very strange, considering that these policies are a part of a welfare state. Welfare states should be helping to even the playing field for low- and high-income citizens, not exacerbating the gap between them. The preference for homeownership is also interesting, considering most homeowners are relatively well off and most renters have lower incomes and are in need of the government’s aid. Once again, this is a strange characteristic of what is supposed to be considered a welfare state.
Part of the reason for the upward distribution of welfare state benefits – and the complexity of the welfare state in general – are American attitudes about welfare, the government and the poor. I argue that a critical juncture for attitudes about government, the welfare state and the poor occurred during the Red Scare following World War II. During the Great Depression, aid to the poor and needy was expected; however, in our current political environment, this is no longer true. This change in expectations can be seen in the stingy benefits given and the hoops recipients are required to jump through. It can also be seen in the generally negative attitude toward people receiving assistance, and in the reality that even the term “welfare” has negative connotations in our society. As Skocpol (1992) wrote, “welfare” refers to “unearned public assistance benefits, possibly undeserved and certainly demeaning” (Skocpol 1992). The change to this type of attitude and conception of welfare took place during the Red Scare – just enough to start the process of increasing returns. These increasing returns culminated in the Reagan revolution and the current Tea Party and libertarian movements.
During the Red Scare, the United States worked to define itself in opposition to communism, and this meant attacking anything associated with communism. This was especially true for government programs: anyone was attacked for proposing government spending programs or programs seen as anti-American. Recipients were also vilified and their loyalties were questioned, as exemplified with public housing residents (Argersinger 2010). This led to a shift in viewing the poor and the welfare state more generally in a negative light.
Current statistics illustrate this negative American attitude about the poor. Part of the way Americans perceive the poor is not that they are undeserving of aid, but that they can work their way out of poverty, or are just lazy. Structural barriers in society are not seen as important, only the self-determination of the individual poor person. In an article exploring why the United States does not have a European-style welfare state, Alesina et. al. (2001) found that 60 percent of Americans, but only 26 percent of Europeans, believe that the poor are lazy (Alesina 2001). In the Kaiser Foundation’s Role of Government Survey, 66 percent of people said most people who want to get ahead can if they work hard, while only 32 percent say hard work and determination are not a guarantee for success (Role of Government Survey, 2010). Part of this is a view on social mobility in America that does not exist elsewhere: 71 percent of Americans, but only 40 percent of Europeans, believe the poor have a chance to escape poverty (Alesina 2001). The authors of the 2001 study also point out the role that race plays in Americans’ support of welfare. A disproportionate share of low-income individuals and potential recipients of welfare are racial minorities: “race is the single most important predictor of support for welfare,” and America’s troubled race relations are clearly a major reason for the absence of a European-style welfare state (Alesina 2001). Views on the poor are important, but so are attitudes about the government and specific policies.
Support for the welfare state and government is more complex. There seems to be a paradox that citizens want the government to provide certain services, but they do not want higher taxes. Some citizens also favor decreased government spending in general. Howard (2007) highlights the mixed signals that are sent by citizens who “feel that government is too powerful and cannot be trusted, and yet who want government to do more to help the elderly, the sick, the poor, and children” (Howard 2007). This is part of the reason for the high use of submerged policies like tax expenditures: they can help specific groups but aren’t visible policies that are easily attacked.
The problem with these submerged policies is that they benefit the people who need the help the least. This is in direct conflict with how a welfare state should work. In order to change housing policy so that it aids those people who need it the most, I recommend a change from a focus on homeownership to a balanced approach. The majority of money gets spent on policies for homeowners, yet renters often have lower incomes and are in more need of aid.
This philosophical shift from a focus on homeownership to a more balanced approach would affect the major components of housing policy. To achieve this more balanced approach, I recommend some changes to housing policy in the United States. First, I argue that the Section 8 housing vouchers should be expanded and available to more people. This is one of the most effective programs at aiding renters, but supply for the aid falls far below the demand and need. Next, the home mortgage interest deduction should be fundamentally changed. Currently, the HMID does not encourage homeownership; instead, it increases “overall consumption” by encouraging the construction of larger homes (Landis 2010; Prante 2006; Glaeser 2003; Collins 2007). So, to accomplish the HMID’s goal of encouraging homeownership, I recommend changing it from a tax deduction to a tax credit. This tax credit would be a fixed amount that could be applied to homeowners, and if their tax total was less than the credit, they would get a refund check from the government.
This action would stop the upward distribution of the HMID and would actually help low-income homeowners. There needs to be a change of priorities in our federal housing policy so that the money currently spent on upper-income earners through the HMID can be redistributed to programs like Section 8, which provide safe and affordable housing to the truly needy. More money for Section 8 would improve the availability and living conditions for the millions of people on the waiting list for this program. The HMID, which didn’t start out as a welfare program, has been transformed by special interests into a perk for high-income citizens while lower-income citizens sit in desperation on Section 8 waiting lists.