In-Depth Analysis, June 9, 2006
By Robert D. Dietz, Ph.D.
*Report available to the public as a courtesy of HousingEconomics.com
The mortgage interest deduction and the real estate tax deduction are two of the most important preferences for homeowners in the federal income tax code. The deductions promote homeownership and reduce tax liabilities for home-owning taxpayers. Moreover, as this article demonstrates, the deductions are used widely and expansively across the nation. Based on the most recent (2003) IRS data, this article estimates the number of taxpayers who claim these deductions, the average deduction, and the aggregate amounts of mortgage interest and real estate taxes deducted by state and congressional district .
Mortgage Interest Deduction
Itemizing taxpayers may deduct interest on acquisition and home equity loans for a qualified residence. In general, qualified residences include the principal residence of the taxpayer and one other home. Taxpayers may deduct interest on acquisition loans on balances up to $1 million and home equity debt up to $100,000. Points on a home mortgage loan of a principal residence are deductible as mortgage interest. The Congressional Joint Committee on Taxation estimates that the value of the mortgage interest deduction to taxpayers, that is, its tax expenditure, is equal to $69.4 billion for 2006.
It is estimated that the congressional district with the largest amount of mortgage interest deducted is the 14th district of California, with an aggregate of $3.2 billion (Estimation methods). The 14th district encompasses portions of San Mateo, Santa Clara and Santa Cruz counties and is home to Silicon Valley. The top six congressional districts in terms of aggregate mortgage interest deducted are located in California. The five congressional districts with the least mortgage interest deducted are located in New York City. The average congressional district has $773 million in mortgage interest deducted for all taxpayers. Not surprisingly, among states, California has the most amount of mortgage interest deducted at $65 billion. North Dakota has the least at $260 million. The aggregate amount deducted depends on both the number of taxpayers claiming the deduction and the average amount deducted.
The 6th congressional district of Colorado contains the highest number of mortgage interest deducting taxpayers at approximately 153,000. The 6th district contains outlying areas and suburbs of Denver, Colorado. In the 1990s, the sixth contained the fastest growing county in the United States. The other top-ranking counties contain the fast-growing suburbs of such cities as Atlanta, New York, and Washington, D.C. The six districts with the smallest number of mortgage interest deducting taxpayers are located in New York, where the number of renters dominates the number of homeowners.
The average congressional district contains approximately 80,000 mortgage interest deducting taxpayers. Figure 1 presents a graph of the distribution of the number of taxpayers deducting mortgage interest. In general, the distribution resembles a bell curve, with the exception of the New York renter-dominated, urban congressional districts. Among states, California has the highest number of mortgage interest deducting taxpayers, with 4.6 million taxpayers using the preference. Wyoming has the fewest, with only 36,000 taxpayers reporting mortgage interest as an itemized deduction.
The congressional district with the highest average amount of mortgage interest deducted (per taxpayer who claims the deduction) is the aforementioned 14th of California with an average of approximately $35,000 of mortgage interest deducted per taxpayer. The average across all congressional districts is about $9,500 of mortgage interest deducted per taxpayer. The distribution of averages is shown in Figure 2. California has the highest average mortgage deduction among states at approximately $14,000. Oklahoma has the lowest, with an average mortgage deduction for taxpayers in the state equal to $5,700.
Real Estate Tax Deduction
Itemizing taxpayers may, in general, deduct state and local tax payments. For homeowners, the most important of these taxes is the state and local real property tax . Taxpayers may also deduct foreign real property taxes. The Joint Committee on Taxation estimates that the tax expenditure for the real estate tax deduction is equal to $19.9 billion for 2006.
The congressional district with the largest amount of real estate taxes deducted is the 3rd district in New York, which is the eastern half of Nassau County, located on Long Island and home to suburbs of the New York metropolitan area. The 3rd district of New York deducted an estimated $1.25 billion in real estate taxes in 2003. The top nine congressional districts with respect to total real estate taxes deducted are suburban and metropolitan districts of New York and New Jersey. The lowest level of real estate tax deductions are found in urban, renter-dominated districts of New York City. The average congressional district has about $270 million in aggregate real estate tax deductions. Again, the state of California records the highest level of real estate taxes deducted at $16.5 billion. However, New York is a close second, with $12.5 billion. Wyoming recorded the smallest amount of real estate taxes deducted among states, at $65 million.
The top five congressional districts in terms of number of real estate tax deducting taxpayers are located in the state of New Jersey, with the top district being the 3rd congressional district of New Jersey, which contains suburban residential areas of Philadelphia. The 3rd district contains over 173,000 taxpayers who deduct real estate taxes. The bottom six districts in terms of the number of real estate tax deducting taxpayers are located in New York. The average congressional district contains over 88,000 taxpayers who deduct real estate taxes. California possesses the highest number of real estate deducting taxpayers with nearly 5 million taxpayers. Wyoming has only 40,000 taxpayers who deduct real estate taxes. Figure 3 presents the distribution of real estate tax deducting taxpayers among congressional districts. Similar to the mortgage interest deduction, the distribution is approximately bell-shaped, with the exception of a few renter-dominated congressional districts in New York.
The congressional district with the highest average amount of real estate taxes deducted (per taxpayer who claims the deduction) is the 18th of New York with an average of approximately $12,000 of real estate taxes deducted. The 18th of New York includes the affluent Westchester area of the New York suburbs. The second highest average is recorded for the 7th district of Texas, which comprises the western suburbs of Houston. The 7th district has an average of approximately $8,900 of real estate taxes deducted. The bottom three districts in terms of average real estate taxes deducted are the 2nd, 3rd and 4th congressional districts of Alabama with approximately $550 to $675 of real estate taxes deducted on average.
The average congressional district has an average amount of somewhat less than $3,000 of real estate taxes deducted per taxpayer. New Jersey has the highest average, with the average real estate deducting taxpayer claiming $6,000 in real estate taxes as a deduction. Alabama has the lowest average, $868. Figure 4 shows the distribution of these averages across congressional districts.
*Set of Tax Estimates by Congressional Districts (Excel)
*Set of Tax Estimates by State (Excel). *Excel tables revised Aug. 23
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 The number of congressional districts, 435, has remained constant since 1911, except for the 1959-1962 period, during which there were 437 districts (due to the admittance of Hawaii and Alaska as states). Based upon the 2000 Census, the average congressional district possesses a population of approximately 647,000. Seven states contain only one congressional district, an at-large constituency for the state. The District of Columbia is granted a non-voting delegate. Return to the Article
 According to IRS Regulations section 1.164-4, taxpayers may not deduct real estate taxes, if such taxes are “assessed against local benefits.” In practice, these means taxes that are only assessed against a property that directly benefits from the revenues generated by the tax. For example, if a special tax is assessed on property owners of a particular street for the purpose of building a sidewalk along that street, that tax is not deductible for federal tax purposes because it is assessed against direct, local benefits that improve the value of the property. Return to the Article