The effect of a tax break is the same as any other kind of government expenditure--money out of the treasury, and in someone's pockets. But there's one difference: With tax-based subsidies, the government gives you more money the more you already have. Take the deduction for mortgage interest, worth $55 billion to homeowners in 1990. (The entire budget for subsidized rental housing that year, by way of contrast, was $8 billion.) In theory, it's the birthright of the middle class; in practice, the lion's share of the benefit accrues to the most affluent. Congress's Joint Committee on Taxation estimates that the wealthiest 5 percent of the population picked up more than one third of all the mortgage-interest tax benefit last year.
Here's how it works. Imagine a couple in south Minneapolis; he supervises telemarketers, she works at a downtown office, and together they make $35,000. They bought a house four years ago--your basic two-bedroom bungalow, nice woodwork, needs some fixing--for $75,000. If they don't bother to itemize deductions (only one in five Americans do), they don't get any benefit from the interest deduction. If they do, the subsidy, based on a 9 percent mortgage, is worth an average of 13 percent of their payments, or about $81 a month, for the first 10 years. (The subsidy declines in value as the years go on because interest makes up a smaller portion of the payment.)
By comparison, take a family making $500,000. Say they bought a comparatively inexpensive two-story in Eden Prairie. It has five bedrooms, a formal dining room, informal dining room, living room, family room, amusement room, two fireplaces, heated four-car garage, a porch overlooking the golf course, and a $360,000 price tag. In this case, the government picks up about 35 percent of the family's mort
gage payments during the first 10 years, for a total of $1,020 a month. Second homes qualify too, and if the family buys a new boat they may be able to write off that interest--provided the yacht has a bathroom.
From homes it's a short way to property taxes--probably the most unpopular of all taxes, because you get a bill for the full amount rather than having them dribbled out over time. In California, the tax revolt of the 1970s led to Proposition 13, which froze valuations for homeowners who stayed put, and sent taxes through the roof for the next generation of buyers. By the early 1990s, note Barlett and Steele, some homeowners in the Watts section of L.A. paid taxes at a higher rate than their counterparts in Beverly Hills. A single professional woman in West L.A., making $40,000, paid more property tax per square foot on her bungalow than convicted junk bond king Michael Milken did on his eight-bathroom estate.
In Minnesota the disparities aren't quite as drastic, in part because the state taxes the first $72,000 of a home's value at a reduced rate. Still, in our example, the family in Eden Prairie would pay $8,900 a year in property taxes, or about 1.8 percent of their income, while the south Minneapolis family would pay $1,152, or 3.3 percent of their income. According to a 1995 study by the state Department of Revenue, the top 1 percent of taxpayers (those with incomes over roughly $190,000) made 13.9 percent of all the income in the state, but paid only 10.5 percent of all the residential property taxes (not counting cabins); by contrast, people making between about $18,000 and $23,000 had 5.8 percent of the income, but paid 8 percent of the property taxes.
And the gap is likely to widen. For a long time, Minnesota was one of the few states taxing the most expensive homes at a higher rate. But in 1991, the Legislature brought the top rate down from 3 percent to 2 percent of market value. Since government spending didn't go down by a corresponding share, the result was a massive redistribution of the tax burden from the people in mansions to everyone else. In 1994, a study by the state chapter of Citizens for Tax Justice showed that local property taxes had gone up between 5 and 50 percent in almost every city and town, with a few exceptions: North Oaks (down 0.3 percent); Wayzata (down 9.6 percent); and Minnetonka Beach (minus 12 percent).
This session, lawmakers passed a tax break for cabins, which should be worth $500 annually to most owners. And next year is likely to finally bring results from years of lobbying by business interests--a thorough property-tax reform that would feature a reduction in commercial and industrial rates at its center. All the proposals floated so far would shift a good part of the burden to poor and middle-income people; the only question is whether they'll pay through higher homeowner taxes or new sales taxes.
One more thing about property taxes: They, too, qualify for a tax deduction. For the Eden Prairie family, that means a savings of more than $3,500. The folks in south Minneapolis reap a mere $210.
There's a reason why people with higher incomes are far more likely to itemize deductions than those in the lower brackets: There are so many deals to take advantage of. Some write-offs are phased out as income rises, but the majority are not. Like the deduction for investment interest--money borrowed to, say, play the stock market. It was worth some $11.6 billion in 1990, according to the Joint Committee on Taxation; more than 80 percent of that was claimed by people who had incomes over $1 million each and collected an average write-off of $115,000, on top of any profits they made from their investments.