Upside Down: New report shows most asset building spending helping the wealthy

It is widely accepted that ownership of assets – a home, savings accounts, stocks and investments, a business – is a cornerstone of family financial security. Assets provide a cushion against temporary setbacks and allow for an investment in greater opportunities and economic success in the future. Government policies have long promoted asset building through a combination of direct expenditure programs and, especially, through preferential tax treatment in the federal tax code of home mortgages, savings account contributions, capital gains income, and other items.  States, too, promote asset building, in large part by “piggybacking” on federal itemized deductions for such items as the home mortgage deduction and property taxes on state income taxes.

A new report from CFED and the Annie E. Cassey Foundation (AECF) calculates annual federal expenditures on asset-building policies to be $384 billion. Of this total budget, ninety per cent of benefits, or $348 billion, is delivered through the tax code, while just 10 percent, or $37 billion, takes the form of direct government expenditures. Most of the latter is in the area of scholarships and grants for post-secondary education. Conversely, the vast majority of the total federal budget in the areas of homeownership, savings and investment, retirement accounts and business developments takes the form of tax credits, deductions, and lower tax rates.

Here’s the thing. These policies to promote savings, investment and ownership primarily subsidize the wealthy, and offer few, if any benefits to low- and moderate-income households. Take, for example, homeownership. According to the report:

Federal asset-building policies allocate $137.6 billion toward encouraging homeownership, and
all but $1.1 billion of that is through tax expenditures. These policies disproportionately benefit
higher-income owners who have more expensive homes, allowing them to deduct more mortgage
interest and property tax payments and avoid more capital gains when they sell the home.

Homeowners with lower incomes often find the amount they could claim in their deduction
would not be large enough to make a difference in their tax liability. This explains, in part, why
only 27 percent of taxpayers claimed the deduction in 2008 despite the fact that 67 percent of
Americans owned homes, and two out of three of those homeowners held a mortgage. Analysis
of the data shows that nearly 80 percent of the value of mortgage and property tax deductions
accrued to the top fifth of taxpayers.

The skewing of benefits to the wealthiest households is even more pronounced in the areas of savings and investment and retirement, where most low- and moderate-income households do not own the assets that benefit from preferred tax treatment.

Using a model developed by ITEP, the report shows the distribution of tax benefits from three of the largest asset-building policies – the mortgage interest deduction, property tax deduction and preferential rates on capital gains and dividends – which together account for nearly two-thirds of the federal asset budget. The results are displayed below. Among the key findings: the wealthiest five per cent of taxpayers received 53 percent of the benefits,  while the bottom 60 percent of taxpayers received only 4 percent. The lowest fifth of taxpayers, those with incomes under $19,000, collectively received almost no benefits at all.

As the Washington Post noted in an editorial on the report: “Something is wrong with this picture” when half the benefits of a $400 billion component of the federal budget goes to the wealthiest five percent of the population.

Overall, the CFED/AECF report describes federal policies as “upside down”:

We cannot avoid the sad irony that government policy aimed at building wealth is largely helping the rich get richer.

So, what can be done? The report suggests that what we must do is “work towards creating a more equitable and transparent set of strategies for saving money and building wealth.” One component of this strategy can be refundable tax credits for savings initiatives that benefit low- and moderate-income households. Proposals before Congress to amend the Savers Credit, for example, would accomplish this on a large scale, as would the creation of accounts at birth for every child. At the state level, we have discussed ways Oklahoma could expand participation in the state’s 529 College Savings program, which primarily serves higher-income households. CFED/AECF also suggest placing caps on the values of homes and other assets that can be deducted. A similar proposal at the state level recently advanced by the Institute for Taxation and Economic Policy would involve states doing away with or capping federal itemized deductions on the state income tax, which makes our state tax system much more regressive and provides tax benefits primarily to the wealthiest. Shifting resources away from tax expenditures towards direct budget outlays could also improve fairness and provide for greater transparency and accountability.

Hopefully the “Upside Down” report will spark a renewed discussion of what we are now doing to promote assets and what we should be doing. For as the report states:

At a time when the economic downturn has left many low- and middle-income families struggling to get by, we can ill afford a federal wealthbuilding strategy that primarily helps those who are already wealthy.