Department of Revenue: Without Legislative Action the Mortgage Interest Deduction Will Remain Regressive and Inequitable

C Confidential Draft- not for public release

Department of Revenue

Without Legislative Action

the Mortgage Interest

Deduction Will Remain

Regressive and

Inequitable

March 2022

Report 2022-11

C Confidential Draft- not for public release

Why this audit is important

The Mortgage Interest Deduction

(MID) is a regressive tax expenditure

that is estimated to cost the state

over $1 billion for the 2021-23

biennium in forgone revenue. It is the

largest housing-related tax

expenditure and seventh largest

overall.

The Governor’s message in the 2021-

23 Tax Expenditure Report calls for

more review of tax expenditures, like

the MID, from an equity and racial

justice perspective.

Many tax expenditures have largely

escaped the same level of rigorous

review typical for direct

appropriations. Forgone revenue

from tax expenditures could be used

to fund other critical state services

or to lower overall tax rates.

The Legislature established in

statute that Oregon’s tax system

adhere to the basic values of fairness

and equity and that tax proposals

should be evaluated based on a set

of guiding principles including ability

to pay, efficiency, and even

distribution.

What we found

1. Higher income taxpayers receive most of the benefits from the

MID. For example, roughly 18,000 taxpayers with incomes in the

top 1% received more benefit from the MID than the 727,000

taxpayers in the bottom 40% combined. (pg.12

)

2. Average MID benefits and the percentage of taxpayers receiving

them vary considerably among Oregon counties, with a handful of

mostly urban counties receiving a disproportionate share. For

example, in the 2018 tax year taxpayers in Clackamas County

received an average benefit of $331, while taxpayers in Wheeler

County received an average of $71. (pg. 14

)

3. Due to

significant differences in homeownership rates and income,

people of color in Oregon receive disproportionately less MID

benefits than white people, especially for Black or African

American, Latino, and Native American people. For example, the

homeownership rate for Black people in Oregon is more than 30%

lower than for white people. (

pg. 17)

4. Promoting homeownership is a commonly cited purpose for the

MID. (pg. 21

) However, we did not find any evidence to support

this assertion. In Oregon, the primary barriers faced by

prospective low- to moderate-income homebuyers include high

home prices, limited funds for down payments, and credit issues,

none of which are addressed by the MID. (

pg. 19)

5. The MID receives no state-level evaluation, limiting accountability

for its regressive outcomes. Without this information,

policymakers, the media, and the public cannot fully participate in

decisions about how to allocate state resources. (pg. 24

)

Audit Highlights

Department of Revenue

Without Legislative Action the Mortgage Interest

Deduction Will Remain Regressive and Inequitable

What we recommend

While our auditee was the Department of Revenue, our two recommendations are directed to the Legislature. The

Department of Revenue’s response can be found at the end of the report.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 1

Introduction

The home mortgage interest deduction (MID) is a tax expenditure known as an itemized deduction that

allows some, but not all, homeowners to reduce their taxable income by the amount of interest paid on

their mortgage. Tax expenditures like the MID represent a substantial investment on the part of the

state in the form of forgone revenue.

The Oregon Legislature established a goal in statute that the state’s income tax system be equitable

and fair and follow guiding principles including ability to pay, even distribution, and efficiency, making it

critical these significant investments are regularly evaluated to ensure these principles and their

intended purpose are met.

The Department of Revenue is charged with administering the MID for the state, but the authority to

change the policy rests with the Legislature. The objective of this audit was to examine the distribution

and equity of the mortgage interest deduction and determine the current level of review the deduction

receives.

The mortgage interest deduction is an itemized deduction that costs

the state over $1 billion biennially

The MID is one of a handful of itemized deductions that Oregon taxpayers can claim on both their state

and federal income tax returns. It is one of more than 375 tax benefits considered to be a tax

expenditure in Oregon and is expected to cost the state over $1.1 billion in the 2021-23 biennium.

Oregon allows taxpayers to deduct mortgage interest due to the state’s connection to the federal

definition of taxable income, and the state typically follows federal limitations and rules for the MID.

Oregon taxpayers can claim their mortgage interest as an itemized deduction on both

their state and federal income tax returns

It has long been the practice in the United States to encourage specific taxpayer behavior by

subsidizing certain costs through tax deductions from both federal and state taxes. These deductions

can be claimed by taxpayers on their federal income tax return and are expenditures that can be

subtracted from adjusted gross income to reduce their tax bill.

There are two types of deductions a taxpayer can claim:

the standard deduction and itemized deductions. Thirty

states and the District of Columbia allow taxpayers to

claim numerous types of itemized deductions. Apart from

the exemption for Oregon income tax and other states’

sales tax, Oregon allows the same itemized deductions as

the federal government. Examples of itemized deductions

available in Oregon include a deduction for property taxes paid, charitable gifts, medical and dental

expenses, and home mortgage interest. However, not all taxpayers benefit from itemizing their

deductions.

While itemized deduction amounts vary, the standard deduction is a one-size-fits-all reduction in the

amount of an individual’s taxable income. For it to be advantageous for a taxpayer to claim itemized

The mortgage interest deduction is one of

more than 375 tax benefits considered to

be a tax expenditure in Oregon and is

expected to cost the state over $1.1 billion

in the 2021-23 biennium.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 2

deductions like property taxes, charitable gifts, or mortgage interest, their total deductible expenses

must exceed the standard deduction for their filing status. Figure 1 shows how personal income tax is

calculated in Oregon.

Figure 1: There are multiple steps to calculating personal income tax in Oregon

The MID is one of the costliest income tax expenditures in Oregon

The MID is one of hundreds of tax benefits defined as a “tax expenditure” by Oregon statute. Tax

expenditures can be viewed as government spending administered through the tax code because they

grant special tax preferences to incentivize specific activities. They are a significant financial

commitment and source of state spending.

In the 2019-21 biennium, forgone revenue from tax expenditures reduced tax collections by an

estimated $24.5 billion.

While there are 377 individual tax expenditures currently specified in Oregon

and federal law, there are several extremely large income tax expenditures influencing that total.

State of Oregon 2021-23 Tax Expenditure Report, “The revenue impact is generally estimated as the amount of tax not

collected due to the tax expenditure, but the dollar impact is not the amount of revenue that could be gained by repealing the

tax expenditure.” As a result, this total is only a rough estimate of the magnitude of all tax expenditures.

Federal Adjusted

Gross Income (AGI)

Additions

Oregon

subtractions and

either the

standard

deduction or

itemized

deductions

Oregon

taxable

income

Oregon

tax rates

Total

tax

Credits

Tax

liability

2021

Standard Deduction

Limits

A flat

-dollar reduction in

your AGI.

Single or Married Filing

Separately:

$2,350

Head of Household:

$3,780

Married Filing Jointly or

Qualifying Widow(er):

$4,700

Itemized Deductions

Medical and dental

expenses

roperty taxes

Charitable contributions

Interest paid on

mortgage

21 tax rates for single

taxpayers living and

working in Oregon

First $3,6

50 of taxable

income:

4.75%

Between $3,6

51 and

$9,050 of taxable income:

6.75%

Between $9,

201 and

$125,000 of taxable

inco

me: 8.75%

Over $125,000 of taxable

income:

9.9%

Credits

(for example)

Earned Income Tax

Working Family

Households and

Dependent Care

Personal Exemption,

Rural Health

Practitioners, Political

Contributions,

Retirement Income,

Oregon Cultural Trust

Contributions, Income

Tax Paid to Other State

21 tax rates for

arried taxpayers living

and working in Oregon

First $7,

300 of taxable

income:

4.75%

Between $7,

301 and

$18,

400 of taxable income:

6.75%

Between $18,

401 and

$250,000 of taxable

income:

8.75%

Over $250,000 of taxable

income:

9.9%

A “Tax Expenditure” is...

“[…] any law of the federal government or this state that exempts, in whole or in part, certain persons, income,

goods, services or property from the impact of established taxes, including but not limited to tax deductions,

tax exclusions, tax subtractions, tax exemptions, tax deferrals, preferential tax rates and tax credits.”

ORS 291.201

Oregon Secretary of State | Report 2022-11 | March 2022 | page 3

Because tax expenditures like the MID are written into the tax code, they often will continue

indefinitely — regardless of how costly or effective they are for the state.

Tax expenditures in Oregon come in a variety of forms, including: exclusions, deductions, subtractions,

and credits. Figure 2 describes each of these types of common income tax expenditures and provides

an example.

Figure 2: Examples of four common types of income tax expenditures

In Oregon, the deduction for home mortgage interest for the 2021-23 biennium will be the largest

housing related tax expenditure, the fourth largest personal income tax expenditure, and the seventh

largest tax expenditure overall. As shown in Figure 3, the revenue impact estimate for the MID for the

2021-23 biennia is $1.1 billion. In 2018, the most recent tax year with available data, the MID reduced

state personal income tax revenue by $440 million, nearly 5% of the total personal income tax liability

for the year. Funds forgone from the MID could be used to fund other state programs or be used to

reduce overall income tax rates.

Credit

Reduces tax liability dollar-for-dollar. Some

credits are refundable, meaning a credit in

excess of tax liability results in a cash refund.

Example: Earned Income Tax Credit is a

refundable federal tax credit for low- to

moderate-income working individuals and

families.

Deduction

Reduces the amount of taxable income for

certain types of expenses by the greater of

the standard deduction or itemized

deductions.

Examples: Deduction for property taxes paid

and deduction for interest paid on a home

mortgage.

Subtraction

Represents income taxed by the federal

government but not taxed by Oregon.

Example: Social Security income is exempt

from the Oregon personal income tax.

Exclusion

Excludes income that would otherwise be

counted towards a taxpayer’s income.

Example: Employees generally pay no income

tax on contributions employers make on their

behalf for medical insurance premiums.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 4

Figure 3: The MID’s biennial revenue impact has been around $1 billion since 2013

Source: State of Oregon Tax Expenditure Reports 2013 – 2023.

Note: For all but 2021-23, we used the revised revenue impacts from the following biennium.

Taxpayers can claim the MID on their federal tax returns and it is a substantial tax expenditure at the

federal level. The Congressional Research Service estimated the deduction for mortgage interest

amounted to $25.5 billion in forgone federal revenue in fiscal year 2020.

Oregon’s income tax system typically conforms to federal tax law

Oregon’s income tax code closely parallels the federal personal income tax code. This means changes in

federal deductions like the MID often directly affect Oregon taxpayers’ taxable income and tax liability.

Since 1969, Oregon’s definition of taxable income has been based on the federal definition of taxable

income, as defined by the Internal Revenue Service (IRS). Since 1997, the Oregon Legislature opted to

automatically connect to the federal tax code for all future changes in taxable income. Automatic

connection or “rolling reconnect” means specific legislation is required to disconnect from Federal tax

law. Even with this automatic connection, Oregon’s Legislature must annually consider updating the

federal connection as it relates to items other than taxable income.

The state has maintained this conformity to federal tax law due to concerns about keeping

administrative costs low and minimizing complexity for taxpayers, among other reasons. However, the

Legislature has chosen to disconnect from some specific tax policies over the years. For example, in

1975 the Legislature decided to disconnect from increases made to the federal standard deduction by

establishing Oregon’s own standard deduction and personal exemption policies separate from federal

policies.

In Oregon, taxpayers can compare their potential state standard deduction to their potential state

itemized deduction and claim whichever provides a lower tax bill

. For example, if a taxpayer claimed

the standard deduction on their federal return, they could itemize their deductions on the Oregon

return, and vice versa.

The standard deduction for a taxpayer whose filing status is married, filing separately is $0 if their spouse chooses to itemize

deductions.

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

$1,400,000,000

$1,600,000,000

2013-2015 2015-2017 2017-2019 2019-2021 2021-2023

Oregon Secretary of State | Report 2022-11 | March 2022 | page 5

As shown in Figure 4, Oregon’s standard deduction is substantially lower than the federal standard

deduction.

The 2021 federal standard deduction amount for a taxpayer who is married filing separately

is over five times larger than Oregon’s standard deduction amount. This is partially due to the Federal

2017 Tax Cuts and Jobs Act (TCJA), which nearly doubled the federal standard deduction. After the

2017 TCJA changes went into effect, the number of taxpayers itemizing at the federal level decreased

significantly, and many Oregon taxpayers now use itemized deductions to calculate Oregon tax but not

federal tax.

Figure 4: The federal standard deduction is more than five times higher than Oregon’s standard deduction

Single or Married Filing

Separately

Married Filing Jointly or

Qualifying Window(er)

Head of Household

Federal $12,550 $25,100 $18,800

Oregon $2,350 $4,700 $3,780

Source: Oregon Department of Revenue Form OR-W-4; IRS Form W-4

Oregon still adheres to the federal limits and definitions for the MID. In addition to doubling the

standard deduction at the federal level, the TCJA reduced the maximum mortgage amount that

qualifies from $1 million to $750,000.

It also limited the deductibility of home equity debt related to

purchasing, building, or substantially improving a qualified home. Under prior law, a homeowner could

also deduct interest on the first $100,000 of home equity-related debt regardless of how it was used.

For example, a taxpayer could have used the proceeds from a home equity loan to purchase a boat and

still qualify for the deduction. Without action by Congress, these changes to the mortgage interest

deduction and standard deduction will revert to pre-TCJA law after 2025.

Taxpayers may claim the MID for both a primary and secondary qualified residence, although the total

limits apply to the total that can be claimed and not individual residences. The IRS defines a “qualified

residence” as a house, condominium, cooperative, mobile home, house trailer, boat, or similar property

that has sleeping, cooking, and toilet facilities.

DOR is charged with administering Oregon’s income tax system and

plays a key role in reporting on tax expenditures

By statute, the Department of Revenue (DOR) is responsible for administering the revenue and tax laws

of Oregon, with some exceptions. The agency is responsible for administering 36 different tax

programs, including personal income and corporate excise taxes, the corporate activities tax, state

marijuana tax, as well as a variety of other taxes. The agency also administers 10 fee programs and 11

other revenue related programs. DOR is also responsible for providing oversight of local property tax

administration by counties, valuing most industrial and other large-scale properties, and administering

several property tax relief programs. DOR also provides debt collection services for more than 180

state agencies and local governments. DOR’s total 2019-21 budget was $339.1 million with 983 full-time

equivalent staff.

Standard deduction amounts can change between tax years, with Oregon’s standard deduction amounts tied to inflation.

These limits are lower for taxpayers who file as Single, or Married Filing Separately. Prior to TCJA, taxpayers who filed as Single

or Married Filing Separate could only claim interest on the first $500,000 of mortgage debt. This amount was reduced to

$375,000 by the TCJA.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 6

DOR’s Research Section is part of the Administrative Services Division and provides statistical tax data

and reports for use by the public and other partners. The Research Section also plays a key role in the

development of the biennial tax expenditure report. In 2018, the Legislature added two economists

dedicated to supporting the internal efforts of the agency. For the 2019-21 biennium, the Research

Section had a budget of $2.8 million with 10 full-time equivalent employees.

DOR’s Personal Tax and Compliance Division administers the personal income tax program.

Responsibilities include auditing and encouraging voluntary compliance for the personal income tax. In

addition, the division provides help to taxpayers by telephone through the Tax Services Unit, in person

at field office locations, and through informational publications. For the 2019-21 biennium, the Personal

Tax and Compliance Division’s budget was $81.5 million with 391 full-time equivalent employees.

DOR plays a key role in reporting on tax expenditures through the biennial tax

expenditure report

Since 1996, the tax expenditure report has been one of the primary sources identifying and reviewing

existing tax expenditures in Oregon. The 1995 Budget Accountability Act declares the necessity of “a

review of the fairness and efficiency of all tax deductions […] It is in the best interest of this state to

have prepared a biennial report of tax expenditures that will allow the public and policymakers to

identify and analyze tax expenditures and to periodically make criteria-based decisions on whether

expenditures should be continued.” In the most recent 2021-23 Tax Expenditure Report, the Governor

explains the report should be used by the public and policymakers “to see how individual tax policies

are working, and, importantly, who pays or benefits from those tax policies.”

DOR is the primary coordinator for the development and release of the tax expenditure report, with

input from the Governor’s Office, Legislative Revenue Office, and the Department of Administrative

Services. DOR relies on subject matter experts in the applicable state agencies to provide evaluations

on whether the tax expenditures achieve their purpose within the report. DOR also relies on

information from the federal Joint Committee on Taxation and the Congressional Research Service to

evaluate expenditures resulting from Oregon’s connection with the federal definition of taxable income.

The Governor and Legislature set Oregon’s income tax policy

Both the Governor and the Legislature play key roles in establishing income tax policies in Oregon.

There have been attempts made by both the Legislature and the Governor to make changes to the

MID, but none have been successful to date.

Oregon’s Constitution requires a balanced budget be passed every biennium, making the budget

process a key factor in determining the tax policy of the state. Each biennium, the Governor presents

the Governor’s Recommended Budget to the Legislature as a starting point for budget negotiations

during the legislative session. This budget includes proposed spending for each executive branch

agency as well as any tax policy changes necessary to ensure expenses do not exceed revenues. The

Governor’s message at beginning of 2021-23 Tax Expenditure Report

“Our tax code says as much about our values as the budget for which it pays. That’s why this 2021-23 Tax

Expenditure report is such an important tool. Using it, the public and policymakers can see how individual tax

policies are working, and, importantly, who pays or benefits from those tax policies.”

Oregon Secretary of State | Report 2022-11 | March 2022 | page 7

Legislature reviews and revises the Governor’s Recommended Budget and passes tax laws, as

necessary, to provide revenue. The Governor can veto laws, including those changing tax policy,

preventing them from taking effect.

There has been some interest within the Legislature to make changes to the MID since the 2017

legislative session, but none have been successful. In 2017, House Bill 2006 sought to limit the MID by

restricting eligibility to individuals with incomes of $100,000 or less ($200,000 if married filing jointly).

It also put a cap on the amount of interest eligible for the deduction at $15,000 and restricted its use

to primary residences.

House Bill 3349 in 2019 would have scaled back deduction limits for taxpayers with incomes greater

than $200,000, eliminating the deduction at incomes of $250,000 and above while also limiting the MID

to primary residences.

In 2021, House Bill 2578 and Senate Bill 852 proposed changes to the MID similar to those considered in

2019. Each of these bills proposed using the revenue created from limiting the MID to fund other

housing-related programs, with an emphasis on promoting affordable homeownership and preventing

homelessness. Senate Bill 852 was estimated to generate more than $180 million in revenue in the

2023-25 biennium.

The Governor also called for a change to the MID in her 2021-23 recommended budget. She

recommended removing the eligibility of second homes and estimated this change would generate $21

million for the 2021-23 biennium. This change was not approved by the Legislature.

Attaining homeownership in Oregon is a challenge, and people of

color disproportionately experience barriers

With the ninth lowest homeownership rate in the country and a chronic housing shortage, attaining

homeownership in Oregon is a challenge. Additionally, racially discriminatory lending practices both

explicit and implicit and economic trends in wealth building have made attaining homeownership even

more difficult for people of color living in Oregon.

Oregon ranks low in homeownership rate nationally and is predicted to face additional

housing challenges

Oregon has a statewide housing shortage. The Oregon Housing and Community Services (OHCS)

agency’s 2021 Regional Housing Needs Analysis

estimated over the next 20 years, an additional

584,000 new homes are needed to meet housing demand, with nearly one quarter of these homes

necessary to accommodate the state’s current population.

To meet this need, Oregon developers

would need to increase current production of housing two-fold. Affordable housing units in Oregon are

in particularly short supply. OHCS reports “failing to make progress on underproduction will lead to

worsening trends of rising prices and cost burdening that will most affect those at the lowest end of

the income spectrum.”

Building on New Ground: Meeting Oregon’s Housing Need, A Companion Document to the Regional Housing Needs Technical

Report, February 2021

The statute requiring this analysis requires estimates include attached and detached single-family housing, multifamily housing,

manufactured dwellings, and mobile homes.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 8

According to the U.S Census, at the end of 2020 the State of Oregon had a homeownership rate of

64% — the ninth lowest rate in the country. The national average homeownership rate at the end of

2020 was 67%. Oregon’s homeownership rate has consistently ranked in the bottom third of states

over the last five years. OHCS’ 2019-23 Statewide Housing Plan

identifies expanding homeownership

for low- and moderate-income people as a priority.

Rental housing units affordable to low-income households are in short supply in Oregon, and rental

costs have continued to rise, outpacing incomes. According to the 2021-23 Statewide Housing Plan,

there is a shortage of 85,000 units affordable to households with income below 30% Median Family

Income,

and 27% of Oregon renter households have “severe housing cost burden.” Severe housing

cost burden means these families are spending more than half of their income on housing and utilities.

This burden falls disproportionately on people of color, with more than 50% of African American, Native

American, Alaska Native, and Pacific Islander households identifying as severely housing cost burdened,

compared to 34% for white households.

Oregon is also faced with a growing unhoused population. Higher homelessness rates can indicate

difficulty finding affordable housing as well as decreased access to the resources needed to stay

housed. According to the U.S Department of Housing and Urban Development’s Point-In-Time count, in

Oregon approximately 15,800 people experienced homelessness in 2019, an increase of 19% since

2015.

At the time of that 2019 count, only 25% of people experiencing homelessness were

concentrated in the Portland Metro area and most of Oregon’s homeless families lived in coastal

counties and southern Oregon. In the OHCS 2021 Analysis of Impediments report, stakeholders

indicated that in addition to increasing the stock of affordable housing, increasing emergency shelter

beds, mental health resources, permanently supportive housing units, and emergency rent assistance

have the greatest potential to help people experiencing homelessness or who are at risk of

homelessness.

History of discriminatory policies like red lining and racial deed covenants have shaped

current racial inequities in homeownership

The wealth building benefits of homeownership have not been equally available to all people living in

Oregon. People of color disproportionately experience barriers to attaining homeownership. Past

discriminatory homeownership practices including redlining, racial deed covenants, and economic

trends in wealth building have shaped current inequities in homeownership.

Breaking New Ground: Oregon’s Statewide Housing Plan, 2019-23

Median Family Income is a standard measure of annual income that varies by geography and family size. In rough terms, Median

Family Income represents the midpoint income for families in a particular geography.

OHCS: “The numbers obtained during the Point-in-Time Count do not provide a full picture of everyone experiencing

homelessness in Oregon. This number should be understood as an absolute minimum number of people experiencing

homelessness in Oregon.”

Severe housing cost burden falls disproportionately on people of color, with more than 50% of African

American, Native American, Alaska Native, and Pacific Islander households identifying as severely housing cost

burdened, compared to 34% for white households.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 9

The Oregon Constitution of 1857 included racial provisions against Black and Asian Americans. When

Oregon was founded in 1859 and became the 33

state in the union, it also became the only state in

the union to forbid Black Americans from working, living, or owning property within its borders. Racially

restrictive covenants were added to property deeds to prevent property owners from selling, leasing,

or renting their property to non-white people. While these laws were eventually repealed in later years,

it was not until 2002 when the discriminatory language was removed from the Oregon Constitution by

voters.

Between 1935 and 1940, the Home Owners’ Loan Corporation, a federal agency, created “Residential

Security” maps of major American cities. These maps were used by loan officers as part of a systematic

appraisal process that included neighborhood-level characteristics for evaluation of mortgage lending

risk. The racial makeup of neighborhoods were explicit factors that were often decisive in assigning risk

levels for specific neighborhoods. The neighborhoods that received the lowest marks were shaded in

red on these maps, leading to the term “redlining.” The Federal Housing Authority (FHA) would then

discourage banks from granting mortgage loans to properties located in these redlined neighborhoods.

The use of the Home Owners’ Loan

Corporation “Residential Security” maps

and other discriminatory mortgage loan

practices were made illegal with the

passage of the Fair Housing Act of 1968,

and racially restrictive covenants no longer have legal legitimacy. However, racially discriminatory

lending practices and neighborhood segregation have created intergenerational wealth and

homeownership gaps for people of color in Oregon that are still present today.

For example, the effects of this discrimination can be seen when comparing Oregon’s white

homeownership rate to the homeownership rates for communities of color. American Community

Survey (ACS) five-year estimates for 2018 show homeownership rates were lower for communities of

color in Oregon than for whites. In Oregon, white people were twice as likely to own a home than

people who identify as Black or African American, Native Hawaiian and other Pacific Islander. The

homeownership rate was roughly 20% higher for white people than it was for American Indian and

Alaska Natives.

Even with the existence of the Fair Housing Act, people of color continue to be denied conventional

mortgage loans at a higher rate than white people. Home Mortgage Disclosure Act data show in 2018,

even among the highest income cohort, denial rates were considerably higher in Oregon for Black and

Hispanic or Latino applicants. In Oregon, denial rates for white people in the highest income cohort

were 11% compared to 21% and 18% for Black and Hispanic or Latino people, respectively. Studies of

mortgage lending practices before the Great Recession from 2004 to 2007 also concluded African

Americans were 30% more likely than white Americans to get higher-priced subprime mortgage loans.

Wealth is often intergenerational and accumulates over a long period of time, and while homeownership

is an important opportunity to build wealth, the benefits of homeownership are not equally accrued by

all Americans. Communities of color have been systematically denied opportunities to build long-term

wealth throughout Oregon’s history, the effects of which are still experienced. For example, in 2019 the

Federal Reserve reported nationally, white households have higher levels of equity in their homes.

White people in Oregon are twice as likely to own a home

than Black or African American, Native Hawaiian and other

Pacific Islander people in Oregon.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 10

White households have a mean net housing equity (value minus any debts on the home) of $215,800,

compared to Black and Hispanic households who have only $94,400 and $129,800 of equity in their

homes, respectively.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 11

Audit Results

Oregon’s income tax policy requires evaluation of the tax system based on the following principles:

ability to pay, fairness, equity, efficiency, even distribution, and that it not be regressive. Oregon’s

income tax system is generally progressive, as called for by statute, but the MID is not.

The MID is designed in a way that systematically benefits higher income taxpayers because they are

more likely to itemize their deductions, typically own more expensive homes, and have higher marginal

tax rates. The most commonly cited purpose for the MID is the promotion of homeownership; however,

this assertion is not supported by our analysis of current and past federal and state tax laws. The

deduction is poorly suited for this purpose because its benefits primarily accrue to higher-income

taxpayers who are less likely to need support to achieve homeownership. The MID is an ineffective tool

for promoting homeownership, especially for people who have lower incomes, are from historically

underserved groups including people of color, and those struggling in rural areas.

The Center for Budget and Policy Priorities, National Conference of State Legislatures, and the

Government Accountability Office call for tax expenditures to receive similar scrutiny to budgeted

spending. Even though it is the state’s largest housing subsidy and one of the largest tax expenditures

overall, the MID receives no state-level evaluation. Historic budget issues, limited state-level

administration, and the fact there is not an agency directly accountable for its performance contribute

to this limited scrutiny. This lack of transparency limits the visibility and accountability for the MID’s

regressive outcomes.

MID benefits are not equitably distributed among Oregon taxpayers,

and it does not address the most significant barriers experienced by

low and moderate-income homebuyers

Per statute, Oregon’s income tax system adheres to the basic values of fairness and equity. Tax

proposals should be evaluated based on a set of guiding principles including ability to pay, efficiency,

and even distribution.

Because fairness and equity are subjective criteria, we conducted a

distributional analysis using 2018 individual income tax data to determine who benefits from the MID by

income and geography. We also assessed the distribution by race and ethnicity using data from the

American Community Survey.

We found the MID’s benefits disproportionately accrue to higher income taxpayers who live in urban

counties in Oregon. Using data from the American Community Survey, we found in Oregon, people of

color have significantly lower homeownership rates and were less likely to be represented at higher

income levels than white people. Due to these discrepancies, we conclude in Oregon, white people

disproportionately benefit from the MID when compared to people of color.

ORS 316.003

The American Community Survey is a nationwide survey that collects and produces information on the social, economic,

housing, and demographic characteristics about the nation’s population every year. It is conducted by the U.S. Census Bureau.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 12

MID benefits primarily accrue to higher income Oregon taxpayers

DOR estimates the benefits of a tax expenditure by modelling what each taxpayer’s tax liability would

be with and without the expenditure, with the difference being the revenue impact, or cost, of the

expenditure. Using 2018 individual income tax return data provided by DOR, we calculated the

distribution of MID benefits by income.

We categorized taxpayers by income percentile and found the

majority of MID benefits accrue to the highest income taxpayers. We also found both the likelihood a

taxpayer will benefit from the MID and the average size of the benefit received increases based on

income level.

In 2018, the MID reduced income tax liability of Oregon residents by nearly $414 million dollars with an

additional reduction of $26 million for non-resident and part-year resident taxpayers. As shown in

Figure 5, the highest income taxpayers received the largest proportion of MID tax benefits, with

taxpayers in the top 20% receiving 59% of the total. The roughly 18,000 taxpayers in the top 1%

received more benefit as a total of the group from the MID than the 727,000 taxpayers in the bottom

40% combined.

Figure 5: Higher income taxpayers receive the majority of MID benefits

Income Percentile AGI Range Total MID Benefit Percent of Total MID Benefit

Lowest 20% Below $16,100 $1,553,800 <1%

Second 20% $16,100-$32,900 $12,815,400 3%

Middle 20% $32,900-$57,100 $43,831,900 11%

Fourth 20% $57,100-$100,100 $113,120,000 27%

Next 15% $100,100-$202,600 $157,003,600 38%

Next 4% $202,600-$458,700 $64,804,100 16%

Top 1% More than $458,700 $20,698,900 5%

Total Resident

$413,827,700 100%

Source: OAD analysis of 2018 DOR full-time resident personal income tax data.

More than half a million Oregon taxpayers benefited from the MID in

2018, making it a widely used tax deduction. However, the likelihood

that a taxpayer will benefit from the MID increases significantly with

income. For example, of the taxpayers in the 50

percentile of the

income distribution, meaning their income averages $44,000, just

22% benefit from the MID. Meanwhile, 61% of taxpayers at the 80

percentile — with average incomes greater than $100,000 — benefit

from the deduction. Figure 6 shows the percentage of taxpayers who benefit from the MID by income

percentile.

Additionally, not all taxpayers living in Oregon who claim the MID actually benefit from it. For example,

only a quarter of taxpayers in the lowest 20% who claimed the deduction realized a reduction in their

tax liability.

We used adjusted gross income as our measure of income, consistent with DOR reporting of similar information.

Roughly 18,000 taxpayers in

the top 1% received more

benefit from the MID than the

727,000 taxpayers in the

bottom 40% combined.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 13

Figure 6: The percentage of taxpayers benefitting from the MID increases as income increases

Source: OAD analysis of 2018 DOR resident tax return data.

The average MID benefit received across all Oregon taxpayers in 2018 was $227, but average benefits

increased substantially with income. The average taxpayer in the middle of the income distribution had

their tax liability decreased by $120, whereas the average benefit to the top 1% was nearly ten times

as high at $1,138. Figure 7 shows the average MID benefits by income percentile.

Even when only considering taxpayers who do receive a benefit from the deduction, the difference in

the average benefits is dramatic. At $1,688, the average benefit for taxpayers in the top 1% is more

than triple the $540 average benefit a taxpayer in the middle of the income distribution receives.

Figure 7: Average MID benefits increase dramatically with income

Income Percentile AGI Range Average MID benefit

Average MID reduction

for those who benefit

Lowest 20% Below $16,100 $4 $222

Second 20% $16,100-$32,900 $35 $396

Middle 20% $32,900-$57,100 $120 $540

Fourth 20% $57,100-$100,100 $311 $658

Next 15% $100,100-$202,600 $575 $844

Next 4% $202,600-$458,700 $891 $1,203

Top 1% More than $458,700 $1,138 $1,688

Total Resident $227 $760

Source: OAD analysis of 2018 DOR resident tax return data.

The fairness and equity of tax systems and policies is often assessed based on how a taxpayer’s ability

to pay factors into their level of taxation. In a vertically equitable tax system, those who are more

capable of bearing the burden of taxes pay a greater share of their income than those with less ability

to pay and vertical equity is the basis of progressive income tax systems.

Oregon’s income tax statute calls for a system that uses equity and fairness as guiding principles and

notes tax proposals should be assessed based on factors including ability to pay, equity, and even

22% of taxpayers in

50th percentile benefit

from the MID

61% of taxpayers in the

80th percentile benefit

from the MID

10%

20%

30%

40%

50%

60%

70%

80%

0 10 20 30 40 50 60 70 80 90 100

Percent of Taxpayers Receiving MID Benefit

Income Percentile (Resident Taxpayers)

Oregon Secretary of State | Report 2022-11 | March 2022 | page 14

distribution. Oregon’s overall income tax system is considered progressive because tax rates and tax

liability as a percentage of income typically increase with income.

However, the MID does not meet these principles because a taxpayer’s likelihood of benefitting, and

the average benefit they receive, increases as income increases, thus reducing their overall tax liability.

These higher-income taxpayers have a greater ability not only to shoulder a heavier tax burden, but

also to pay for their mortgages. By providing the largest benefits to those with the greatest ability to

pay, the MID is a regressive, vertically inequitable tax expenditure.

The ability to deduct the interest on second homes is another example of the inequity of the MID.

Although there is not adequate data to determine the distribution of second home MID benefits, DOR

estimates providing the deduction to taxpayers that own second homes will result in forgone revenue

of roughly $30 million in the 2021-23 biennium, just a fraction of the $1.1 billion total of the program.

However, providing this benefit to owners of second homes when others struggle to afford a first home

further increases the inequity of the MID.

MID benefits disproportionately accrue to taxpayers living in a handful of Oregon’s

urban counties

We also assessed the distribution of the MID by county using 2018 tax return data. Based on this

analysis, we found there is significant variation in both the percentage of taxpayers benefiting from the

MID and the average benefits received by county. We also assessed the distribution of MID benefits

between rural and urban counties and found the MID’s benefits accrue disproportionately in a handful

of Oregon’s urban counties.

Figures 8 shows the percentage of taxpayers by county who benefited from the MID. The percentage

ranges from a high of 37% in Columbia County to a low of 17% in Wheeler County. The percentage of

taxpayers who benefit from the MID across all of Oregon’s 36 counties is 30%. Only six of Oregon’s

counties exceed this statewide rate.

OHCS defines rural counties as those that do not include any part of a metropolitan statistical area.

Regressive: Tax liability is a smaller percentage of a taxpayer’s income as income increases.

Progressive: The tax liability as a percentage of income increases as income increases.

Ability to Pay: Those who are more capable of bearing the burden of taxes should pay more taxes than those

with less ability to pay.

Vertical Equity: Taxpayer’s with different ability to pay receive different benefits, with higher income

taxpayers paying a greater share.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 15

Figure 8: The percentage of taxpayers who benefit from the MID varies by county

Source: OAD analysis of 2018 DOR full-time resident tax return data.

Similarly, as shown in Figure 9, there is significant variation in average MID benefits by county. With an

average benefit of $331, Clackamas County is the highest, nearly five times larger than the $71 average

in Wheeler County. There are only six counties — Washington, Clackamas, Multnomah, Yamhill,

Deschutes, and Columbia — whose average is greater than the statewide average of $227.

Figure 9: Average taxpayer benefits from the MID vary widely by county

Source: OAD analysis of 2018 DOR full-time resident tax return data.

We also assessed the county-level distribution of the MID’s benefits by population by dividing each

county’s share of MID benefits by their share of the state’s population. Any county with a ratio of MID

benefits to population greater than 100% means that county received a disproportionate share of the

MID’s benefits. We also performed this analysis using adjusted gross income instead of population. We

10%

15%

20%

25%

30%

35%

40%

Columbia

Clackamas

Deschutes

Washington

Yamhill

Polk

Linn

Crook

Multnomah

Marion

Lane

Jackson

Benton

Clatsop

Hood River

Tillamook

Union

Lincoln

Josephine

Douglas

Umatilla

Wasco

Klamath

Jefferson

Coos

Baker

Wallowa

Curry

Morrow

Grant

Gilliam

Lake

Harney

Malheur

Sherman

Wheeler

Percent of Taxpayers with an MID Benefit

100

150

200

250

300

350

Clackamas

Washington

Deschutes

Columbia

Multnomah

Yamhill

Polk

Hood River

Benton

Jackson

Crook

Lane

Clatsop

Marion

Linn

Josephine

Tillamook

Lincoln

Curry

Douglas

Wasco

Jefferson

Union

Coos

Klamath

Wallowa

Umatilla

Baker

Morrow

Grant

Lake

Malheur

Sherman

Gilliam

Harney

Wheeler

Average MID Benefit per Taxpayer

Oregon Secretary of State | Report 2022-11 | March 2022 | page 16

found a handful of primarily urban counties disproportionately benefit from the MID using both

measures.

• The following counties received a disproportionate share of MID benefits by

taxpayer population: Clackamas, Washington, Deschutes, Columbia, Multnomah,

and Yamhill. All are defined as urban by OHCS.

• The following counties received a disproportionate share of MID benefits by

adjusted gross income: Columbia, Clackamas, Yamhill, Deschutes, Polk, Crook

Jackson, Clatsop, and Washington. All but Crook and Clatsop are considered urban

by OHCS.

Figure 10: A handful of urban counties disproportionately benefit from the MID by taxpayer population

Source: OAD analysis of 2018 DOR full-time resident tax return data, county map layer from the Oregon Geospatial Library.

There are many factors that might explain the disproportionate distribution of MID benefits by county,

including higher home prices and incomes in urban counties. We found the average adjusted gross

incomes in rural counties was nearly 30% lower than in urban counties. This significant income

discrepancy indicates the disproportionate distribution of MID benefits by county is likely correlated

with the deduction’s greater benefit for those with higher incomes.

We did not assess the impact of higher home prices in urban areas. However, a 2018 study by the

Oregon Office of Economic Analysis found while the median income for people who live in rural Oregon

was similar to the nation as a whole, median home prices in rural areas were 30% higher. This indicates

Oregon Secretary of State | Report 2022-11 | March 2022 | page 17

people who live in rural areas in Oregon face greater housing affordability challenges than the rest of

rural America.

MID benefits disproportionately accrue to higher-income homeowners, who tend to be

white

Assessing the distribution of the MID based on race and ethnicity is challenging because this

information is not gathered on Oregon tax returns. However, when analyzing the distribution of the MID

there are two factors that are particularly relevant: the MID is available only to homeowners, and its

regressive nature means its benefit increases with income.

We examined homeownership rates and household income by race and ethnicity using data from the

2018 American Community Survey. Based on significant differences in homeownership rates and

income, we can conclude people of color in Oregon receive disproportionately less benefit from the MID

than white people, especially for people that identify as African American, Latino, and Native American.

The American Community Survey reports homeownership rates by race and ethnicity using self-

reported demographic information from the primary householder. Figure 11 shows the homeownership

rate in Oregon by race and ethnicity.

Figure 11: White people are much more likely to own homes than people of color in Oregon

2018 American Community Survey Race Categories

Homeownership Rate

White 64%

Black or African American 31%

American Indian and Alaska Native 45%

Asian 59%

Native Hawaiian and Other Pacific Islander 31%

Some other race 42%

Two or more races 47%

2018 American Community Survey Ethnicity Categories

Homeownership Rate

Hispanic or Latino origin 41%

White alone, not Hispanic or Latino 65%

Source: OAD analysis of 2018 5-Year American Community Survey data.

As is the case nationwide, white people in Oregon are far more likely to own their homes than are

people from most other races. In Oregon, people who identify as white are more than twice as likely to

be homeowners than people who identify as Black or African American and Native Hawaiian and other

Pacific Islander. The white homeownership rate is roughly 20% higher than it is for American Indian and

Alaska Natives as well as for individuals who identify as some other race and for those that identify as

two or more races. The result is similar by ethnicity, with Hispanic or Latino homeownership 24% lower

than it is for individuals who identify as white and do not identify as Hispanic or Latino. Even with the

existence of the MID, these discrepancies in homeownership rates by race and ethnicity have remained

relatively unchanged over the last 20 years.

Race and ethnicity are reported separately in the American Community Survey.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 18

We also examined the relationship between race, ethnicity, and income using data from the 2018

American Community Survey and found a similar result. Nearly 70% of taxpayers with incomes greater

than $100,000 benefit from the MID and they receive nearly 60% of its total benefits, while making up

only 20% of the population.

As Figure 12 shows, people in Oregon who identify as white are

significantly more likely to have household earnings greater than

$100,000 than people who identify as Black or African American,

American Indian or Alaska Native, and some other race. The only

other group significantly more likely to have incomes greater than

$100,000 are people who identify as Asian.

The result by ethnicity is similar in Oregon with people who identify as Hispanic or Latino being nearly

half as likely to have household incomes of $100,000 or more than people who identify as white, non-

Hispanic or Latino. Based on these significant discrepancies in homeownership rate and income levels

by race and ethnicity, and the relationship these factors have to the distribution of the MID, we can

conclude the MID in Oregon disproportionately benefits white, non-Latino people.

Figure 12: White households are more likely to earn more than $100,000 than households of other races and

ethnicities

2018 American Community Survey Race Categories

Percent of households with incomes

$100,000 or more

White 26%

Black/African American 15%

American Indian/Alaska Native 14%

Asian 37%

Native Hawaiian/Pacific Islander* 26%

Other 14%

Two or More Races 21%

2018 American Community Survey Ethnicity Categories

Percent of households with incomes

$100,000 or more

Hispanic or Latino 15%

White, Not Hispanic or Latino 27%

Source: OAD analysis of 2018 5-year American Community Survey data.

Note: The difference between the White and Native Hawaiian/Pacific Islander sub-groups is not statistically significant. The

American Community Survey and uses a different definition of income than the adjusted gross income taken from the tax return

data. Also, American Community Survey data is presented at the household, not taxpayer level.

The State of Oregon’s Diversity, Equity, and Inclusion Action Plan notes “equity is the effort to provide

different levels of support based on an individual’s or group’s needs in order to achieve fairness in

outcomes.” In Oregon, the MID is a racially inequitable policy based on this standard because its

benefits flow disproportionately to higher income, white people, who already have significantly better

homeownership rate outcomes when compared to people of color.

Discrepancies in homeownership

rates by race and ethnicity have

remained relatively unchanged

over the last 20 years.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 19

The lack of data on race and ethnicity complicates analysis of the MID, however

stakeholders expressed concerns about collecting these data

Currently there are no data that clearly tie race and ethnicity to the MID. At the federal level, the IRS

does not collect data on the race and ethnicity of taxpayers on tax forms and federal analysis of tax

data does not typically include race and ethnicity. Similarly, race data is not collected on tax forms in

Oregon

Not collecting these data hinders efforts by policymakers to evaluate whether a tax policy, like the MID,

produces disparate racial impacts and provide remedies for these inequities. While collecting

disaggregated race and ethnicity data are important in the effort to develop equitable policy, some key

stakeholders we spoke with had concerns about collecting race and ethnicity data on tax forms.

These concerns included:

• Collecting these data may lead to further racial discrimination in the creation and

administration of tax laws, such as through disparate tax enforcement and racially

targeted tax policies.

• Data on the race and ethnicity of taxpayers is too private for tax agencies to

collect and could be used in a discriminatory manner.

• Taxpayers may refuse to disclose this information, leading to non-response bias

that may skew analysis of outcomes.

The Governor, in her introductory letter at the beginning of the 2021-23 Tax Expenditure Report, called

for better data collection so tax expenditures can be better evaluated from an equity and racial justice

perspective in the future. The Governor’s Office, DOR, and the newly formed Racial Justice Council are

currently meeting with other agencies and community groups to begin discussing how racial justice and

equity can be incorporated into tax policy in Oregon.

The MID does not address the primary barriers experienced by prospective low-to-

moderate income homebuyers

As the largest housing subsidy in Oregon, the MID does not address challenges related to obtaining a

home in the state, particularly for low- to moderate-income homebuyers. We met with homeownership

counselors and staff from seven Oregon Homeownership Centers to learn the primary barriers faced by

low- to moderate-income home buyers and how the MID addresses them. Six of the seven centers we

spoke with told us the MID is not an effective tool for helping their clients become homeowners. While

Senate Bill 1569, considered during the 2022 Legislative Session, would direct DOR to collect voluntarily reported and self-

identified taxpayer race and ethnicity data for the purpose of analyzing revenue policy. This bill was under consideration during

the drafting of our report.

Oregon Diversity, Equity, and Inclusion Action Plan: Definition of Equity

“Acknowledges that not all people, or all communities, are starting from the same place due to historic and

current systems of oppression. Equity is the effort to provide different levels of support based on an

individual’s or group’s needs in order to achieve fairness in outcomes. Equity actionably empowers

communities most impacted by systemic oppression and requires the redistribution of resources, power, and

opportunity to those communities.”

Oregon Secretary of State | Report 2022-11 | March 2022 | page 20

most of the centers we spoke with agreed the MID does not help their clients, one center told us when

they discuss the benefits of homeownership with their clients, they use the potential tax benefits from

the MID as a motivator.

There are 18 Homeownership Centers that provide housing counseling services in each of Oregon’s 36

counties. Certified Housing Counselors at these centers provide, among other services, homebuyer

education and financial literacy courses and one-on-one

loan default and post-purchase counseling targeted to

low-to moderate-income prospective homebuyers and

communities of color. They are supported through

grants from OHCS and their counselors are required to

be certified through an approved housing counseling

certification program.

We selected seven Homeownership Centers serving counties across the state, including two Culturally

Specific Organizations focused on serving Communities of Color, and asked them what barriers their

clients face in becoming first-time homeowners. The primary barriers they identified were:

• Limited funds for a sufficient down payment;

• The high price of homes in the current housing market; and

• Credit issues including bad credit or no credit.

We also asked them if they viewed the MID as an effective tool for overcoming these barriers and

helping their clients achieve homeownership. Six of the seven told us the MID did not address these

barriers or help their clients. They noted many of their clients do not have sufficient itemized expenses

to benefit from the deduction and are simply struggling to get into a home in the first place.

One housing counselor told us: “The MID is a tool that serves people at the higher end of the income

spectrum […] and the nature of the housing market is that there is no path for most people to benefit

from the MID.” Another housing counselor told us: “I can’t think of a single client that the MID ever made

a difference for.” We heard from homeownership counselors the MID does not provide any upfront

benefit that can assist their clients in completing a home purchase.

This mismatch between benefit and need limits the value of the MID for low- and moderate-income

homebuyers. In an economic analysis of the MID, the Congressional Research Service found high

transaction costs associated with a home purchase, like down payment and closing costs, are the

primary barrier to homeownership nationally and “because the MID does not lower the primary barrier

to homeownership, its effect on the homeownership rate may be small.”

“I can’t think of a single client that the

mortgage interest deduction ever made a

difference for.”

Homeownership Center, Housing Counselor

The Congressional Research Service found high transaction costs associated with a home purchase, like down

payment and closing costs, are the primary barrier to homeownership nationally and “because the MID does

not lower the primary barrier to homeownership, its effect on the homeownership rate may be small.”

Oregon Secretary of State | Report 2022-11 | March 2022 | page 21

The MID’s design and lack of a clear purpose contribute to its

inequitable outcomes

Identifying the purpose or legislative intent of a tax expenditure is a critical step to determine its

effectiveness because it provides criteria that can be used to judge its outcomes. Oregon’s tax

expenditure report identifies the MID’s purpose as “promoting homeownership by reducing the cost of

mortgages,” a purpose that is commonly cited by other entities. However, based on our review of

federal and state statute and the relevant literature, it is clear the MID was not originally intended to

promote homeownership and its design makes it a regressive tax policy that is poorly suited for this

purpose.

There is no evidence that the MID was originally intended to promote homeownership

A commonly cited purpose for the MID is that it promotes homeownership; however, neither federal

nor state statute identifies a clear purpose or intent for the deductibility of mortgage interest and the

Congressional Research Service states in an annual report: “There is no evidence in the legislative

history that the interest deduction was intended to encourage homeownership or to stimulate the

housing industry.”

When the original federal income tax was instituted in 1913, mortgage interest was deductible along

with other types of interest payments made for business, personal, living, or family expenses.

When

Oregon instituted its own income tax in 1923, it mirrored the treatment of interest used by the federal

government. By 1986, the housing industry considered the preservation of the MID as its most

important issue and it was popular among Americans, even though only one-fourth of the population at

the time benefitted from it. The federal Tax Reform Act of 1986 removed the deductibility of most

types of consumer interest but maintained the MID while placing limitations on the number of homes

and the total mortgage amount that could be claimed. These limits on consumer interest were adopted

for taxpayers in Oregon, due to Oregon’s connection with federal income tax law.

The design of the MID contributes to its inequitable outcomes

Regardless of its original intent, the MID is designed in a way that systematically benefits higher income

taxpayers for three key reasons. First, higher income taxpayers are more likely to itemize their

deductions. Second, higher income taxpayers are more likely to own more expensive homes which

result in larger deductions. Finally, higher income taxpayers have higher marginal tax rates leading to a

larger benefit per dollar deducted.

For example, based on our review of 2018 income tax data, we found that for every $100 deducted,

Oregon taxpayers in the top 20% received a benefit of $9.20, while taxpayers in the second 20% only

received a tax benefit of $5.60; see Figure 13.

“Tax Expenditures: Compendium of Background Material on Individual Provisions.” DOR uses this document to help identify the

purpose of federally connected tax expenditures for the biennial tax expenditure report.

1913 Revenue Act, i.e., Underwood Tariff Act, provides general offset for “all interest paid within the year by a taxable person

on indebtedness.” Also, provides offset for, among other things “the necessary expenses actually paid in carrying on any business

[…] all national, State, county, school, and municipal taxes paid within the year […] losses actually sustained during the year

incurred in trade or arising from fires, storms or shipwreck […] [and] the amount of income the tax upon which has been paid or

withheld for payment,” etc.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 22

Figure 13: MID benefit per $100 deducted increases as incomes increase

2018 Income Percentile Income Range MID Benefit per $100 deducted

Lowest 20% Below 16,100 $0.90

Second 20% 16,100-32,900 $5.60

Middle 20% 32,900-57,100 $8.30

Fourth 20% 57,100-100,100 $8.80

Top 20% 100,100 and above $9.20

All Resident Taxpayers $8.50

Source: OAD analysis of 2018 DOR resident income tax return data.

The design of the MID contributes to the inequitable and regressive outcomes we found. However,

without a clearly stated purpose in statute beyond Oregon’s connection to the federal person income

tax code, it is difficult to know what the original intent was and what the current goals are for the MID

in Oregon. This lack of a purpose specific to the MID makes it difficult to assess its effectiveness. The

Government Accountability Office notes that “identifying a tax expenditure’s purpose is a necessary

first step in determining how the tax expenditure’s performance should be assessed.” While it is difficult

to assess the effectiveness of the MID, the fact that it is a regressive tax policy makes it inconsistent

with the goals stated in Oregon’s income tax statutes.

Some states have designed limitations that may reduce the regressivity of deductions

like the MID

The MID is a common deduction at the state level, with 30 states and Washington D.C. offering it as an

itemized deduction. We examined the itemized deduction practices used by the states that offer the

MID and found 12 have established limits that may mitigate its regressivity. Other types of tax

expenditures, like tax credits, may also provide a more equitable way to encourage homeownership.

States provide itemized deductions to taxpayers in a variety of ways. Some states require taxpayers to

itemize at the federal level in order to claim the same deductions at the state level. Others, like Oregon,

allow taxpayers to itemize regardless of how they filed their federal taxes. Some states use the federal

standard deduction amount, while others, including Oregon, set their own.

We identified 12 states that limit itemized deductions through a variety of approaches, including phase-

downs, phase-outs, flat dollar caps, and credits in lieu of deductions. It is important to note that these

limitations apply to itemized deductions generally, not just to the MID, making it difficult to assess their

impact on specific types of itemized deductions.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 23

Of these, the practices used in Washington D.C., Maine, Utah, and Wisconsin likely have the greatest

potential to reduce the regressivity of the MID.

• Washington D.C. applies a phase-out to all itemized deductions reducing the

amount of itemized deductions that can be claimed by 5% of every dollar of

adjusted gross income greater than $200,000. For example, if a taxpayer’s income

was $250,000, the amount deducted from their income would be reduced by

$2,500.

• Maine also has a phase-out provision that reduces itemized deductions for

taxpayers with adjusted gross incomes starting at $83,850 ($167,700 if married

filing jointly). It also applies a flat cap on the total amount of itemized deductions

that can be claimed. The maximum amount that could be claimed is indexed to

inflation and was $30,050 in 2021.

• Both Utah and Wisconsin require taxpayers to convert their itemized deductions

into a credit at a rate of 6% and 5%, respectively. Utah also applies a phase-out at

a rate of 1.3% that takes effect at a relatively low threshold of $29,758 for couples

who file jointly.

Each of these approaches has the potential to reduce the regressivity of itemized deductions. Phase-

down or phase-out provisions can enhance equity by reducing or eliminating the itemized deductions

for higher-income taxpayers. Flat caps prevent high-income earners with significant itemized

deductions from receiving outsized benefits compared to moderate- and lower-income taxpayers.

Credits can be targeted to enhance after-tax income for low-income taxpayers and prevent higher-

income taxpayers from receiving greater per dollar benefits. Tax credits, especially when they are

refundable, can be seen as more progressive than itemized deductions because they can be used by

lower income taxpayers who do not itemize, and because they reduce tax liability by a fixed amount

regardless of the income tax rate paid.

Mortgage Credit Certificates are an example of a tax credit program designed specifically to support

low- to moderate-income homebuyers. This federal program allows states to convert a portion of their

private activity bond allocation into Mortgage Credit Certificates issued to qualified homebuyers. When

Phase-down: Reduces the deduction(s) by a fixed percentage, for taxpayers above a specified income

threshold. The phase-down reduction is typically capped at 80%. Example: A 3% phase down, $160k threshold

- Every dollar of income earned above $160k results in a 3-cent reduction in itemized deduction(s) that can be

claimed. Total reduction capped at 80%.

Phase-out: Similar to a phase-down, but completely eliminates itemized deductions. Example: A 3% phase-out,

with a phase-out beginning at $160k– Every dollar of income above $160k results in a 3-cent reduction in

itemized deductions. At higher-income levels can result in the elimination of itemized deductions.

Flat dollar cap: Limits the total amount of deductions that can be claimed to a maximum dollar amount.

Example: For cap set at $10k, only $10k worth of combined deductions can be claimed.

Credit in lieu: Replaces each deduction with a credit equal to a fixed percentage of the deduction amount.

Example: $50k in itemized deductions at a 5% rate would reduce tax liability by $2,500.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 24

a qualified homebuyer purchases a home, they are entitled to an annual federal tax credit equal to a

percentage of their mortgage interest for the life of the mortgage. The tax credit percentages vary by

state, typically between 20-40%, and the total credit cannot exceed $2,000 in any given year. The

program is limited to first-time homebuyers and states are required to set sale price and income limits.

Based on our review, 27 states have an active Mortgage Credit Certificate program. Oregon does not

have an active program, but statute allows for one to be established

The MID receives no state-level evaluation, limiting accountability for

its regressive outcomes

Best practices call for tax expenditures to receive similar scrutiny to budgeted spending. Oregon’s tax

expenditure report provides valuable information to policymakers and the public. However, like in most

other states, the MID receives no evaluation in Oregon’s tax expenditure report. Historic budget issues,

limited state-level administration, and the fact there is not an agency directly accountable for its

performance contribute to the lack of scrutiny the MID receives in Oregon. This lack of transparency

limits the visibility of and accountability for the MID’s regressive outcomes.

Best practices call for consistent and rigorous evaluation of tax expenditures like the

MID, but these reviews are rare at the state level

The Center for Budget and Policy Priorities, National Conference of State Legislatures, and the

Government Accountability Office call for tax expenditures to receive similar scrutiny to budgeted

spending. Spending that occurs as part of the budget process, such as funding agency programs and K-

12 education, typically receives regular review and subsequent change throughout the budget process.

In contrast, many tax expenditures have been permanently incorporated into the tax code and require

special legislative action for them to be changed. In other words, even though tax expenditures like the

MID are often as costly as budgeted spending programs, they are not subjected to the same level of

legislative review.

National Conference of State Legislatures best practices state “when lawmakers decide to use the tax

system to make budget decisions or influence behavior, these decisions should be explicit and subject

to frequent evaluation and review.” The organization further states “increasingly the public and

policymakers agree that an accounting and review of tax expenditures should be part of regular sound

budget practices” and to do this, “a complete and frequently updated tax expenditure report is

essential for good policymaking.”

We analyzed tax expenditure review practices of all 50 states and the District of Columbia, and

concluded tax expenditure reports are the primary, and often only, method used for reviewing tax

expenditures at the state level. The Center for Budget and Policy Priorities provides criteria for the

elements that should be included in tax expenditure reports, including that the report be accessible,

detailed, and evaluates the extent to which the purpose of the expenditure has been accomplished, as

well as provide distribution of benefits by income level.

ORS 456.605

Oregon Secretary of State | Report 2022-11 | March 2022 | page 25

However, state reviews of the MID are rare. Out of the 30 states that have a state income tax and offer

itemized deductions, only 12 states and the District of Columbia include a review of the MID in their tax

expenditure report, and even fewer provide detailed evaluations.

The District of Columbia and California publish relatively comprehensive and informative reports on the

MID. Washington, D.C.’s most recent report provides a lengthy evaluation of the MID incorporating

external data from the Congressional Research Service and Urban Institute. The report released by the

California Franchise Tax Board includes an extensive discussion section of the MID where they weigh

the pros and cons of making changes to the MID. In addition to state reviews, the MID is regularly

evaluated at the federal level by the Congressional Research Service in the annual Compendium of Tax

Expenditures.

Oregon state statute requires the Governor work with DOR and the Department of Administrative

Services to produce a tax expenditure report each biennium to complement the Governor’s

recommended budget. The required elements for each tax expenditure in the report include, among

other things:

• Identification of the statutory authority,

• A description of its purpose,

• An estimate of the amount of revenue loss for the coming biennium,

• A determination of whether each tax expenditure has successfully achieved the

purpose for which it was enacted including an analysis of the persons that benefit.

In addition to the tax expenditure report, statute requires the Legislative Revenue Office release a

biennial report that evaluates expiring tax credits, often referred to as sunsetting tax credits. Oregon

has many sunsetting tax credits that are staggered so one-third of Oregon’s income tax credits come

up for review every two years when the Legislature sets its biennial budget. The most recent 2021 Tax

Credit Report contains an in-depth analysis of 11 tax credits which all include a discussion of the policy

purpose, a description of the program, an extensive policy analysis section, and a comparative analysis

of the tax policy in other states. Oregon is listed as best practice for setting sunset dates and

producing this Tax Credit Report; however, most exemptions and deductions like the MID are not set to

sunset, so they do not receive this more intensive level of review.

DOR coordinates the development of the biennial tax expenditure report which

provides no evaluation of whether the MID meets its purpose

Oregon’s tax expenditure report has been identified as a model for other states. DOR plays the primary

role in the development of the tax expenditure report, coordinating its development, calculating

revenue impacts, and organizing evaluations from subject matter agencies. The MID is included as part

of Oregon’s tax expenditure report. However, no evaluation is made as to whether it achieves its

intended purpose.

DOR does the bulk of the coordinating work for the tax expenditure report, with input from the

Governor’s office on points of emphasis at the beginning of each reporting cycle. In July of each

reporting year, DOR sends a letter to all applicable state agencies requesting they provide evaluations

The December 2020 version can be found online at Gov.Info.gov.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 26

of the tax expenditures that are relevant to their program area and relevant data for the report. For

these evaluations, DOR relies on information provided from agencies with missions related to the tax

expenditure’s purpose and engages with each agency throughout the process by providing instructions

and suggestions. If the Governor’s Office requests more detailed evaluations from agencies for specific

expenditures, DOR will request more information from these agencies.

The Department of Administrative Services Chief

Financial Office provides input on deadlines at the

beginning of the reporting cycle and reviews the

report toward the end of the process.

Department of Administrative Services budget

analysts review the tax expenditure material as

part of their biennial budget development

process. DOR also consults with the Legislative

Revenue Office to get feedback on the cost

estimates for each expenditure.

For the MID, the 2021-23 Tax Expenditure Report

includes estimates of both the current and future

biennial costs of the MID, a brief description of

the tax expenditure, the relevant legal citation

and year of enactment, its purpose, and a

description of who benefits from the expenditure

broken out by income level. The report does not

provide evaluation of the extent to which the MID has achieved its purpose, as required by statute. The

2007-09 Tax Expenditure Report was the last time the MID was evaluated to determine whether it was

meeting its intended purpose, with Oregon Housing and Community Services providing the review.

In 2008, due to budget constraints, DOR and the Governor’s Office made the decision to stop

conducting evaluations of income tax expenditures resulting from Oregon’s connection to federal law in

the report. Instead, DOR notes they rely on the evaluations conducted by the federal Congressional

Research Service for federally connected tax expenditures in the tax expenditure report. However,

DOR does not include these evaluations of the MID in the report.

The lack of evaluation of the MID limits public information and hinders the ability of

policymakers to make informed decisions

In addition to the past budget constraints noted above, we identified several factors that contribute to

the lack of evaluation the MID currently receives in Oregon, including a perceived lack of political

feasibility in changing the policy, limited state-level administration, and the fact there is not an agency

directly accountable for its performance. It is critical a $1 billion-dollar biennial tax program such as the

MID be regularly reviewed and evaluated to ensure policymakers and the public can make informed

decisions about its costs and benefits.

Generally, DOR has held it does not advise the Legislature on tax policy issues unless directed to do so.

Although state statute allows DOR the ability to review and recommend changes to Oregon tax law, the

agency has interpreted this statute to extend only to correcting administrative inequities, closing

The cover of 2021-23 Tax Expenditure Report

Oregon Secretary of State | Report 2022-11 | March 2022 | page 27

loopholes and administrative inefficiencies, and establishing incentives for voluntary participation and

compliance. Some stakeholders told us making changes to the MID has not been seen as politically

feasible, limiting the perceived value of evaluating it.

Another cause for the MID’s lack of evaluation is that other than being included as a deduction on state

tax returns, it requires limited state-level administration. As a result, there is not an agency directly

accountable for its performance or incorporates it into its strategy. While OHCS provided previous

evaluation of the MID, it does not have the data required for a systematic evaluation. Although DOR is

the state agency administering the MID and has most of the data required for a systematic evaluation,

it is an administrative agency and not responsible for the housing program area.

The Government Accountability Office reports “for tax expenditures without logical connections to

program agencies, such as those with tax administration purposes like the exclusion from income of

capital gains from the sale of a principal residence, [the U.S] Treasury may be the most appropriate

agency to conduct an evaluation. For many tax expenditures, evaluations will likely require

collaboration among agencies.” It is possible cross-agency collaboration will be required to ensure the

MID receives sufficient and regular review.

According to best practices, including a detailed evaluation of tax expenditures like the MID, along with

a clearly defined purpose, promotes meaningful discourse about whether a particular tax expenditure

should be retained, modified, or eliminated. In addition, the Center for Budget and Policy Priorities

notes it is important for state policymakers to have the information they need to decide whether the

benefits of conforming to the federal tax code are worth the resulting revenue loss. Without

information on the costs and benefits of the MID, lawmakers cannot make an informed decision on

whether its continuation is in Oregon’s best interest. Currently, stakeholders, constituents, and the

media may not have enough information to have a meaningful debate about the value of the MID.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 28

Recommendations

Due to its role as a tax administration agency, DOR management told us the agency is not responsible

for the design of the MID or its outcomes; therefore, we did not make recommendations to the agency

to address the findings. Additionally, while DOR plays a key role in the tax expenditure reporting

process, statute does not specifically identify it as accountable for evaluating the MID.

Barring Legislative action, the MID, as currently designed, will continue to produce inequitable results.

To inform potential changes for a more equitable policy, a regular evaluation is warranted.

To help guide future evaluations and inform policymakers and the public, we recommend the

Legislature:

1. Identify a clear purpose for the MID in statute and determine if changes to the design of the MID

are necessary to ensure that the identified purpose is met.

2. Identify a state agency that will be responsible for regularly evaluating the MID to ensure it

meets its legislatively identified purpose.

Oregon Secretary of State | Report 2022-11 | March 2022 | page 29

Objective, Scope, and Methodology

Objective

This audit had two objectives:

• Determine the distribution and equity of the MID in Oregon by income, geography,

and race and ethnicity.

• Determine the current level of review the MID receives and who should be

accountable for assessing its effectiveness.

Scope

This audit focused on the distribution and equity of the MID as part of Oregon’s income tax system

using data from the 2018 tax year, the most recent year available. We did not review controls or

monitoring practices used by DOR to ensure taxpayer compliance with the MID’s rules.

We focused primarily on the level of review the MID receives from DOR and other relevant state

agencies. We also, as appropriate, examined the practices used in Oregon, other states, and by the

federal government to review and evaluate tax expenditures more generally.

Methodology

To address our objectives, we used a methodology that included, but was not limited to: conducting

interviews, reviewing documentation, reviewing leading practices and approaches used in other states,

and analyzing 2018 Oregon income tax data and data from the 2018 American Community Survey.

To learn about the views, opinions, and perspectives of stakeholders we conducted interviews with the

Oregon Association of Certified Public Accountants, the Coalition of Communities of Color, the Oregon

Realtors Association, the Oregon Homebuilders Association, the Oregon Bankers Association, Housing

Oregon, the Welcome Home Coalition, and the Oregon Center for Public Policy. We also met with

members of the Oregon Legislature and staff at the Legislative Revenue Office.

We met with DOR staff and management to gain an understanding of DOR’s role in administering and

evaluating the MID. We also met with staff from the Governor’s Office to gain an understanding of the

Governor’s role in the current tax expenditure review process.

To learn the barriers faced by low- to moderate-income prospective homebuyers and the MID’s

effectiveness at addressing these barriers, we met with homeownership counselors from the following

seven OHCS certified Homeownership Centers:

• Columbia Cascade Housing Corporation;

• Community Connection of Northeast Oregon;

• Hacienda Community Develop Corporation;

• Neighborworks Umpqua;

• NeighborImpact

• The African-American Alliance for Homeownership and

• DevNW

Oregon Secretary of State | Report 2022-11 | March 2022 | page 30

We reviewed state and federal statutes, IRS Code, and other government publications to determine

how the MID is supposed to operate and to determine the level of review it is supposed to receive. We

reviewed current and past tax expenditure report and other public income tax reports created by DOR.

We reviewed research reports and other studies as well as practices in other states in order to identify

leading practices for enhancing the equity of itemized deductions like the MID, as well as to identify

leading practices for the review and evaluation of MID policies, and tax expenditures more generally.

To determine the distribution of the MID by income and county we analyzed income tax data provided

by DOR for the 2018 tax year that included DOR’s tax expenditure calculations for the MID. This data

included more than 2.1 million taxpayer records. We focused this analysis on full-time resident

taxpayers. To determine the distribution by race and ethnicity we relied on data on homeownership

and income from the 2018 American Community Survey. We assessed the reliability of these data and

found them to be sufficiently reliable for our purposes.

Internal control review

We determined internal controls were not relevant to our audit objectives and did not review them as

part of our planned work.

We conducted this performance audit in accordance with generally accepted government auditing

standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate

evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives.

We believe that the evidence obtained provides a reasonable basis for our findings and conclusions

based on our audit objectives.

We sincerely appreciate the courtesies and cooperation extended by officials and employees of DOR

during the course of this audit.

About the Secretary of State Audits Division

The Oregon Constitution provides that the Secretary of State shall be, by virtue of the office, Auditor

of Public Accounts. The Audits Division performs this duty. The division reports to the elected

Secretary of State and is independent of other agencies within the Executive, Legislative, and Judicial

branches of Oregon government. The division has constitutional authority to audit all state officers,

agencies, boards and commissions as well as administer municipal audit law.

Auditors relied on standards for internal controls from the U.S. Government Accountability Office, report GAO-14-704G.

Audit team

Olivia Recheked, MPA, Audit Manager

Jonathan Bennett, MPA, Lead Auditor

Hillary Hahn, MPP, Staff Auditor

Department of Revenue

955 Center St NE

Salem, OR 97301-2555

www.oregon.gov/dor

150-800-075 (Rev. 03-15)

March 11, 2022

Kip R. Memmott, Director

Secretary of State, Audits Division

255 Capitol Street N.E., Suite 500

Salem, Oregon 97310

Dear Mr. Memmott:

The Department of Revenue appreciates the attention devoted to the Mortgage Interest

Deduction audit by the Audits Division and for allowing us to provide comments on the report.

As part of the biennial budget process, the governor is required by statute to develop a report

on all “tax expenditures” for all tax programs in Oregon. The Department of Revenue has been

the main organizer and contributor to this report since it first began more than two decades

ago. Oregon statute requires that the biennial Tax Expenditure Report, “determine whether

each tax expenditure has successfully achieved the purpose for which the tax expenditure was

enacted and currently serves” (ORS 291.203). Yet, for most tax expenditures, Oregon statute

does not specify the purpose of the expenditure. To address this shortcoming, a 2013 law

change (ORS 173.025) required that Revenue Impact Statements prepared by the Legislative

Revenue Office “must include a statement describing the public policy purpose of the tax

expenditure.” Although this change has been helpful in providing clarity of purpose, it has only

addressed tax expenditures that have been created or extended since 2013. The purpose of

most tax expenditures remains unknown.

The federal government reviews and analyzes federal tax policies. In the upcoming 2023-25 Tax

Expenditure Report, the department will incorporate clear citations of these federal analyses

where Oregon law connects to the federal tax expenditure, including for the mortgage interest

deduction, to better inform readers.

Thank you again for your partnership and for including us in the review of the draft audit.

Betsy Imholt

Director

This report is intended to promote the best possible

management of public resources.

Copies may be obtained from:

Oregon Audits Division

255 Capitol St NE, Suite 500

Salem OR 97310

(503) 986-2255

audits.sos@oregon.gov

sos.oregon.gov/audits