A recent state audit of a mortgage tax deduction found it disproportionately benefited wealthy, white Oregonians — Street Roots found many other tax deductions may share the same characteristic.
The Secretary of State released an audit of the Mortgage Interest Deduction last month, a tax code enabling some homeowners to reduce their taxable income by the amount of interest paid on mortgages up to $750,000, including interest on vacation homes.
The findings were neither great nor surprising: the benefits of the MID tilted heavily in favor of the wealthy, urban and white. The Secretary of State found the deduction “deeply inequitable” and also regressive.
The audit comes at a time when housing instability is reaching an apex. Tens of thousands of Oregonians are facing eviction, displacement, homelessness and back rent.
“While houselessness and the lack of affordable housing impact communities all over the state, auditors found the state’s largest housing subsidy mostly benefits wealthy and white Oregonians in urban counties,” the Secretary of State Office said in a press release.
Notably, the study found that the mortgage interest deduction receives no state-level evaluation as to whether it is meeting its purpose, limiting accountability for its inequitable outcomes. The March MID audit is the first tax expenditure in Oregon to be assessed for equity.
A review of tax expenditures by Street Roots finds that the vast majority of the 431 existing expenditures are rarely reviewed at all. The result is billions of dollars in foregone tax revenue, a form of indirect spending that benefits some but harms others, with people of color generally bearing the brunt of unfairness.
“There's a high risk that other tax policies have inequitable attributes or outcomes, because of the limited oversight we do have for them,” said Kip Memmott, audits director for the Secretary of State.
These recent findings highlight an aspect of how institutional racism and other forms of inequity are sustained, a legacy acknowledged by Gov. Kate Brown in the state’s most recent tax expenditure report.
“We no longer pass tax laws written with blatantly racial intent in statute,” Brown said in the report. “But by providing special tax treatment to business income from wages, or providing tax benefits to those who own their home over those who rent their home, we are amplifying the racial inequities that sit at the foundation of our economy.”
This foundation is borne out by expenditures written into code decades ago.
“One of the things that I think was really interesting in the report that we note, is how often (a) policy was in place before women could vote, or before the Civil Rights Act. So, you know, things change,” Memmott said.
Unexamined impacts
While tax codes are a core way of how money is circulated, equity is not a lens historically applied to them.
Some expenditures tied to federal tax code receive federal audits, which don’t consider equity in their assessment of how expenditures are working. Others may be periodically reviewed for monetary impacts, assessments that — again — don’t consider social impact.
Another roughly 75% of existing tax expenditures don’t get reviewed at all.
Reviews are difficult in part because of the vastness of the tax code, Tim Fitzgerald, interim research director for the Oregon Department of Revenue, said. In some ways the barrier is workflow.
“You might think, ‘well, why don't they just bring them into the review process?’ Except there's a lot of them. You know the last book had 377 provisions. There's fewer than 70 in the review process,” Fitzgerald said. “So they'd be like quadrupling workload for the legislature, if they did want to review all of these provisions on a regular basis to try to evaluate the impact of the policy.”
“Policymakers should be cautious about the racial impact of their tax policies and be mindful that providing tax relief to one group of taxpayers could lead to disproportionate negative impact on communities of color.”
— Gov. Kate Brown
Racial data is also not compiled in tax filings, a barrier to understanding impacts noted in the most recent tax expenditure report. Organizations are beginning efforts to gather this information at a national level, and Oregon’s Racial Justice Commission is looking at ways to bridge this gap.
A core takeaway of the MID audit, said Jonathan Bennett, one of the lead auditors, is the absence of a system for review for expenditures. Direct budget expenditures are debated and reviewed extensively through the legislative process and subsequent monitoring, and temporary tax decisions with a deadline are reassessed when they sunset (though this assessment doesn’t generally involve an equity audit).
But with tax expenditures, the process is different.
“A lot of the tax expenditures are written into the tax code and they don't have an expiration date. So they don't go through that process unless somebody actively goes in — you know, a legislator or somebody — and tries to make a change to them,” Bennett said. “Tax expenditures that don't have a sunset date would be examples of ones that aren't going through the same sort of review that regular budgeted spending gets.”
In the most recent tax expenditure report, only three related to housing were reviewed. They were not assessed for equity, though analysis shows all three predominantly benefit the wealthy.
Unreviewed tax expenditures — for property-related taxes alone — add up to billions and are likely to have impacts similar to the MID. For example, the Capital Gains on Inherited Property, an expenditure written into the tax code in 1921, totaled $474,500,000 in lost tax revenue in from 2019-2021.
The Capital Gains on Home Sales expenditure, enacted in 1997, added up to $411,200,000 in foregone revenue from 2019-2021.
Substantive amounts of tax revenue are stripped in other expenditures outside property taxes as well, such as the Deferral of Interest on Savings Bonds, from 1951, totaling $5.8 million and the Capital Gains on Gifts, an expenditure from 1921 adding up to $25 million from 2019-2021.
The most recent tax expenditure report found that 98% of the tax benefit — $109 million — for the Tax Rates for Certain Pass Through Income benefitted 20,820 taxpayers with incomes above $100,100.
A belated look at tax codes
The prevailing system of wealth excluded black people and people of color by design. At their inception, many policies laid the foundation for the inequity playing out today and tax codes are a core element in that process, concentrating wealth for some and stripping it from others. White people are far more likely to own homes, and benefit from property tax expenditures, than people of color.
“Building generational wealth, one of the most common ways to do that is through homeownership, and owning land and property,” Ethan Stuckmayer, senior planner of housing programs at the Oregon Department of Land Conservation and Development, said. “If you're excluded from that from the beginning, and barriers have been put in front of you to exclude you from that process for at this point over 100 years and longer, that just perpetuates a system where people don't have access.”
These kinds of policies, Stuckmayer said, are “all wrapped into that same bundle of systemic issues related to access to homeownership.”
In recent years, Stuckmayer said, attention in the state has focused on outmoded codes and laws that sustain prevailing social injustices.
“There are efforts to undo some of those systemic barriers,” Stuckmayer said.
Legislative gridlock
In recent years there have been several bills introduced to restructure the MID, but the legislature didn’t pass any of them:
In 2017, HB 2006 sought to limit the MID by capping eligibility to those earning $100,000 or less ($200,000 if married or filing jointly) a year. The bill would have limited interest eligible for the deduction to $15,000 and removed second homes from qualifying.
HB 3349, introduced in 2019, would have limited the MID to primary residences, reduced deduction limits for people earning more than $200,000, and made those earning more than $250,000 ineligible.
In 2021, HB 2578 and SB 852 again proposed changes to the MID similar to those considered in 2019. The bills proposed using the revenue created from limiting the MID to fund housing security programs. SB 852 would have generated an estimated $180 million. Neither bill passed.
In Brown’s most recent budget she recommended a much more limited change to the MID — removing the eligibility of second homes, a change estimated to generate $21 million. The legislature didn’t approve this change.
In the recent report on Oregon tax expenditures, Governor Brown authored a statement noting the fundamental inequity embedded in tax law and other financial systems and called on lawmakers to be aware of social justice.
“Policymakers should be cautious about the racial impact of their tax policies and be mindful that providing tax relief to one group of taxpayers could lead to disproportionate negative impact on communities of color,” Brown said in the report.
It’s a sentiment echoed by the Secretary of State’s office, which is looking anew at the fallout of unaccountable tax code.
“There's not a specific policy. It's likely there are other tax policies that are regressive and inequitable, and that is something that (is a priority for) Secretary Fagan. It's something that we will be looking at as we do additional tax audits here in the next couple of years,” said Memmott.
The effort, Memmott told Street Roots, is less about a particular policy or exemption, and more about having an approach that considers social impacts in the first place.
“I would hope, respectfully, the legislators really start looking at the tax code,” Memmott said. “There's a whole bunch of information out there about regressive and inequitable taxes.”