Berkeley Program on Housing and Urban Policy

The most significant U.S. housing subsidy programs are funded by tax expenditures through the Internal Revenue Code (IRC). Beyond the subsidy to homeownership provided to all owner occupants through the personal income tax, the IRC provides additional subsidies to specific groups of homeowners. The Mortgage Revenue Bond (MRB) program permits lower levels of government to issue tax-exempt debt, using the proceeds to supply mortgages at below-market interest rates to deserving households. States are also permitted to issue and distribute Mortgage Credit Certificates (MCCs) which entitle recipient homeowners to claim a tax credit for some portion of the mortgage interest paid rather than the tax deduction claimed by other homeowners.

This paper documents the wide variations in reliance upon MCCs and MRBs across the United States and the emergence of Mortgage Credit Certificates as the largest housing program administered by the state of California. The paper provides an economic analysis of the MCC program using micro data on program recipients in California during the period 1996-1998. We estimate the extent and distribution of MCC subsidies across income and demographic groups, measuring the dollar amount of federal subsidies and their effects upon the user cost of residential capital and the demand price of housing. We analyze the geographic incidence of MCC subsidies across neighborhoods of varying socio-demographic composition and deprivation. Finally, we note important differences in the administrative and programmatic costs of MCCs and MRBs, suggesting that there are clear reasons to favor Mortgage Credit Certificates as a means of subsidizing deserving households.