Critics have long assailed the federal tax code’s homeowner subsidies as lucrative tax breaks for upper income households that are essentially worthless to lower income households financially constrained from purchasing a home. This article examines the subsidies through a different lens and reveals another serious flaw that has received little attention. It demonstrates how the homeowner subsidies do very little to contain the negative housing externalities that other federal policies seek to abate and, worse yet, probably undermine these policies by subsidizing behavior that exacerbates the externalities. These policies are wide-ranging and include: (i) combating blight, deterioration and public health risks in disinvested housing markets, (ii) decreasing economic and racial housing segregation, and (iii) lessening environmental degradation that results from housing choices, while reducing the vulnerability of those who reside in environmental hotspots.

This article provides several explanations for this disconnect. Among these is an idealization of homeownership, reflected in the tax code, which sees only its positive externalities. Accordingly, the tax code subsidies reward homeowner decisions at large and without regard to the negative externalities that often follow from homeowner location and form decisions. This serves as the basis for this article’s contention that the current subsidies are not “smart.”

This article then explores whether and how the homeowner subsidies might be made smarter. Applying public finance research on the track record of more targeted, development subsidies at the state and local levels, the article identifies three conceptual legal models for smarter subsidies. It also identifies a host of accompanying challenges, many related to trying to tackle multiple housing externalities that vary across and within thousands of different localized housing markets. The article calls attention to the recent revolution in the quantity, quality and access to market, submarket and property specific real estate data, which is fueling a significant uptick in the sophistication of strategic housing planning at the community level. These advances may be the best reason to think that smarter federal homeowner subsidies are possible. This article closes by suggesting that Congress authorize HUD to pilot a program of community specific homeowner subsidies, seeking to foster community level innovation that might later be more broadly adaptable.


homeownership, homeowner tax breaks, federal income tax, disinvestment, housing segregation, and environmental degradation

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University of Hawai'i Law Review (Forthcoming, 2017)


COinS Matthew Rossman Faculty Bio