In the summer of 1974, while the Watergate scandal consumed Washington, Congress passed a law that would quietly reshape how Americans understand federal spending for the next half-century. The Congressional Budget and Impoundment Control Act created the Congressional Budget Office, established the modern budget process, and introduced a concept that now governs nearly every fiscal debate: the baseline. The baseline was meant to provide a neutral starting point for measuring the cost of legislation. Instead, it became a mechanism for making certain kinds of government spending invisible—and for protecting the beneficiaries of that invisibility from democratic scrutiny.
Consider the home mortgage interest deduction. In fiscal year 2023, this single provision reduced federal revenue by an estimated $30 billion, according to the Joint Committee on Taxation. The overwhelming majority of that benefit flows to households in the top income quintile; the Tax Policy Center calculates that over 60 percent of the deduction’s value accrues to the top 20 percent of earners, and less than 4 percent reaches the bottom 40 percent. Yet when the Congressional Budget Office scores the federal budget, the mortgage interest deduction appears not as a $30 billion expenditure on housing, but as a reduction in revenue against a baseline that already assumes its permanent extension. The subsidy vanishes into the baseline. A proposal to expand rental assistance for low-income families, meanwhile, is scored as new spending that must be offset. The accounting framework itself determines whose housing need counts as a cost.
This is not a technical glitch. It is a moral architecture, built into the language of budgeting, that has shaped American housing policy for five decades. To understand how we arrived here—and what the baseline conceals—we must examine the 1974 Act, the concept of tax expenditures, and the distributional consequences of a fiscal language that refuses to name its beneficiaries.
The Birth of the Baseline
Before 1974, the federal budget process was a patchwork of committee prerogatives and presidential impoundments. President Nixon’s refusal to spend appropriated funds—impounding billions for housing, water projects, and other domestic programs—provoked a constitutional crisis that culminated in the Budget Act. The law created the House and Senate Budget Committees, the Congressional Budget Office, and a timetable for budget resolutions. It also established the baseline: a projection of future spending and revenue under current law, assuming no policy changes.
The baseline was intended as a neutral yardstick. In practice, it embeds a set of assumptions that are anything but neutral. The most consequential assumption is that permanent provisions of the tax code—including the mortgage interest deduction, the exclusion of employer-sponsored health insurance, and the preferential rate on capital gains—will continue indefinitely. Temporary provisions, by contrast, are assumed to expire. This distinction creates an asymmetry: a permanent tax expenditure is scored as costing nothing relative to the baseline, while a new direct spending program of identical dollar value is scored as a cost that must be paid for. The baseline does not measure what the government spends; it measures deviations from what the government has already chosen to spend through the tax code.
Stanley Surrey, the Harvard law professor who served as Assistant Secretary of the Treasury for Tax Policy in the 1960s, recognized the problem early. Surrey coined the term “tax expenditure” to describe provisions that achieve policy goals through tax reductions rather than direct outlays. He argued that a deduction for mortgage interest is functionally identical to a check mailed to homeowners: both transfer public resources to private individuals. The difference is that the check appears in the budget as an expenditure, while the deduction disappears into the revenue baseline. Surrey’s insight was that the tax code is not merely a revenue-raising instrument; it is a spending instrument, and one that operates with far less transparency than appropriations.
Congress adopted Surrey’s taxonomy in the Congressional Budget Act, requiring the Treasury to publish an annual Tax Expenditure Budget. But the taxonomy never penetrated the baseline. Tax expenditures are listed in an appendix, not scored as costs. The mortgage interest deduction appears in the Tax Expenditure Budget as a line item, but it does not appear in the budget resolution as an outlay. The baseline treats it as part of the natural revenue landscape, as permanent and unremarkable as the standard deduction. This accounting choice has profound distributional consequences.
The Mortgage Interest Deduction as Case Study
The mortgage interest deduction was not designed as a housing policy. It emerged from the 1913 income tax, which allowed the deduction of all personal interest. When Congress eliminated the deduction for consumer interest in the Tax Reform Act of 1986, it preserved the mortgage interest deduction, transforming it from a residual feature of the tax code into an explicit housing subsidy. The deduction allows homeowners to reduce their taxable income by the amount of interest paid on mortgages up to $750,000 of principal. The value of the deduction depends on the taxpayer’s marginal rate: a household in the 37 percent bracket receives 37 cents of benefit for every dollar of mortgage interest, while a household in the 12 percent bracket receives 12 cents. A household that does not itemize—because its deductions do not exceed the standard deduction—receives nothing.
This structure ensures that the deduction’s benefits are concentrated among higher-income households. Data from the Federal Reserve Bank of St. Louis’s FRED database shows that the share of aggregate income held by the top 20 percent of households has risen from 43 percent in 1970 to over 52 percent in recent years, while the homeownership rate for households in the bottom income quintile has remained below 40 percent. The mortgage interest deduction does not cause this divergence, but it reinforces it, subsidizing the accumulation of housing wealth by those who already possess it while offering nothing to those who rent. A household earning $200,000 with a $500,000 mortgage receives thousands of dollars in annual tax savings; a household earning $40,000 and paying $1,200 in monthly rent receives no housing subsidy at all.
The baseline makes this asymmetry permanent. Because the mortgage interest deduction is a permanent provision of the tax code, the CBO’s baseline assumes it will continue forever. Any proposal to reduce or eliminate the deduction is scored as a tax increase, requiring offsetting tax cuts or spending reductions to avoid adding to the deficit. A proposal to create a new rental assistance program, by contrast, is scored as new spending that must be fully offset. The baseline thus creates a fiscal bias in favor of existing tax expenditures and against new direct spending, regardless of their relative merits as housing policy.
The Language of Tax Expenditures as Moral Evasion
The term “tax expenditure” itself is a linguistic compromise that obscures more than it reveals. Surrey intended it as a tool of exposure, a way of forcing policymakers to acknowledge that deductions and exclusions are spending. But the word “expenditure” suggests an outlay, a check written by the Treasury. The mortgage interest deduction involves no check. The homeowner simply reports less income and pays less tax. The transaction is invisible to the homeowner, who experiences it not as a government benefit but as a reduction in a government burden. This psychological framing is politically potent: recipients of direct housing assistance are often stigmatized as dependents, while recipients of the mortgage interest deduction are understood to be keeping more of what they earn.
This linguistic distinction is not accidental. It reflects a deeper moral claim about the relationship between the individual and the state. When the government writes a check, it is spending public money. When the government allows a taxpayer to keep money that would otherwise be collected, it is—in the dominant political rhetoric—respecting private property. The baseline encodes this distinction as fiscal reality. A dollar not collected is not a dollar spent; it is a dollar left in the pocket of its rightful owner. The baseline thus functions as a moral accounting system, one that treats tax expenditures as the natural order and direct expenditures as deviations from it.
The consequences for housing policy are stark. The federal government spends roughly twice as much on housing subsidies through the tax code—primarily the mortgage interest deduction and the property tax deduction—as it does through the Department of Housing and Urban Development’s entire budget. HUD’s rental assistance programs serve approximately 5 million households; the mortgage interest deduction benefits roughly 34 million, but those 34 million are disproportionately affluent. The baseline makes this imbalance self-perpetuating: the tax expenditures grow automatically with home prices and interest rates, while rental assistance must be appropriated annually, competing with every other discretionary priority.
What the Baseline Conceals
The baseline’s treatment of tax expenditures conceals not only their cost but their distribution. The CBO’s budget projections report aggregate revenue and outlay figures; they do not show who benefits from tax expenditures or how those benefits are distributed across income groups. The Tax Expenditure Budget provides some distributional analysis, but it is published separately from the budget resolution and receives far less attention. The result is a fiscal discourse in which the mortgage interest deduction is discussed as a middle-class benefit—the “American Dream” subsidy—while its actual distribution is regressive and its cost is hidden.
This concealment has real effects on policy choices. When Congress considered capping the mortgage interest deduction as part of the 2017 tax overhaul, the debate focused on the impact on home values and the housing industry, not on the distribution of the subsidy. The cap that ultimately passed—reducing the maximum mortgage principal from $1 million to $750,000—affected only the most expensive homes, leaving the basic structure of the subsidy intact. A more fundamental reform, such as converting the deduction to a flat-rate credit available to all homeowners regardless of income or itemization status, was never seriously considered. The baseline made the deduction appear costless, and the language of tax relief made it appear virtuous.
The Investor.gov guide to compound growth offers an instructive parallel. That resource explains how regular investing over time builds wealth through the compounding of returns—a process that benefits those who have capital to invest. Homeownership, subsidized by the mortgage interest deduction, functions similarly: it allows households to build equity through mortgage amortization and price appreciation, compounding their wealth over decades. Renters, who receive no comparable subsidy, are excluded from this wealth-building mechanism. The baseline treats the homeowner’s compounding advantage as fiscally neutral, while any attempt to provide renters with a comparable advantage is scored as a cost. The accounting framework thus reinforces the wealth gap it refuses to measure.
The Distributional Consequences
The mortgage interest deduction is not the largest tax expenditure—the exclusion of employer-sponsored health insurance and the preferential rate on capital gains are larger—but it is the most visible symbol of how the baseline distorts housing policy. Its distributional impact is well documented. The deduction is worth an average of $5,500 per year to households in the top income quintile, according to the Tax Policy Center, and less than $100 to those in the bottom quintile. Because the deduction is tied to mortgage size and marginal tax rate, its value increases with income and housing consumption. A household purchasing a $1 million home with a $750,000 mortgage receives the maximum benefit; a household purchasing a $150,000 home with a $120,000 mortgage receives a fraction of that benefit, and only if it itemizes.
The geographic distribution is equally skewed. The deduction’s value is concentrated in high-cost, high-income metropolitan areas—coastal California, the New York City region, Washington, D.C.—where home prices and incomes are highest. These are also the areas where the deduction is most likely to be capitalized into home prices, meaning that the subsidy flows not to homeowners as a net benefit but to sellers and developers as higher prices. The deduction thus functions as a transfer from taxpayers in low-cost regions to property owners in high-cost regions, mediated through the tax code and invisible in the baseline.
The intergenerational consequences are perhaps the most troubling. Younger households, burdened by student debt and facing higher home prices relative to income, are less likely to own homes than previous generations at the same age. The homeownership rate for households headed by someone under 35 fell from 43 percent in 2004 to 38 percent in 2023. These younger households receive little or no benefit from the mortgage interest deduction, yet they will bear the fiscal cost of the revenue it forgoes—either through higher future taxes, reduced public services, or larger deficits. The baseline makes this intergenerational transfer invisible, treating the deduction as a permanent feature of the revenue code rather than a policy choice with distributional consequences that compound over time.
Reforming the Baseline
Reforming the baseline to account for tax expenditures as spending would require a fundamental change in budget scoring conventions. One approach, advocated by the Center on Budget and Policy Priorities and others, would treat all tax expenditures as equivalent to direct spending for scoring purposes. Under this approach, the mortgage interest deduction would appear in the budget as an outlay, and any proposal to expand it would require an offset, just as an expansion of rental assistance does. This would not eliminate the deduction, but it would make its cost visible and its distribution subject to the same scrutiny as direct spending.
A more modest reform would require the CBO to produce a distributional analysis of tax expenditures as part of its baseline projections, showing not only the aggregate revenue loss but the distribution of benefits by income quintile, race, and geography. This would not change the scoring conventions, but it would change the information available to policymakers and the public. The Treasury already produces some of this analysis in the Tax Expenditure Budget, but it is not integrated into the budget process and receives little attention. Requiring the CBO to include distributional analysis in its baseline would make the beneficiaries of tax expenditures visible in the same document that frames the fiscal debate.
A third approach would focus on the language itself. The term “tax expenditure” is a compromise that has failed to achieve Surrey’s goal of transparency. A more honest term would be “tax subsidy” or “spending through the tax code.” The choice of words matters. When policymakers debate the mortgage interest deduction, they are debating a housing subsidy, not a tax cut. The language should reflect that reality. This is not merely a semantic preference; it is a moral claim about the nature of public finance. Every dollar the government does not collect is a dollar it has chosen to allocate to a specific purpose and a specific group of beneficiaries. The baseline should name those beneficiaries, and the language of budgeting should make their subsidy as visible as a check from the Treasury.
In the broader landscape of policy communication, the challenge of naming invisible spending mirrors the challenge of naming any complex system. Just as a book title generator can help authors crystallize an argument into a phrase that captures its moral weight, so too must budget reformers find language that captures the moral weight of tax expenditures. The mortgage interest deduction is not a technical provision of the revenue code; it is a housing policy that transfers $30 billion annually to predominantly affluent homeowners. The baseline should say so.
The Moral Accounting of Housing Policy
The baseline is not a neutral technical tool. It is a moral accounting system that encodes assumptions about whose spending counts as a cost and whose subsidy counts as the natural order. The mortgage interest deduction is a case study in how that system operates: a permanent tax expenditure that benefits the already-housed, the already-affluent, and the already-propertied, while rental assistance for the poor is scored as a burden on the Treasury. This asymmetry is not an accident of budget rules; it is a policy choice, made in 1974 and reinforced in every budget cycle since.
The question is not whether the mortgage interest deduction should exist. Reasonable people can disagree about the appropriate level of housing subsidy and the best mechanism for delivering it. The question is whether the fiscal framework that governs that debate is honest. A framework that makes one kind of housing subsidy invisible while treating another as a cost is not honest. A framework that refuses to name the beneficiaries of public spending is not honest. A framework that treats the compounding of housing wealth as fiscally neutral while treating the amelioration of housing poverty as a burden is not honest.
The 1974 Budget Act was a response to a crisis of democratic accountability. President Nixon’s impoundments had demonstrated that the power to spend is the power to govern, and that the budget process must constrain that power. But the baseline that emerged from that Act has become a tool of evasion, not accountability. It allows Congress to spend through the tax code without acknowledging the spending, to subsidize the affluent without naming the subsidy, and to perpetuate housing inequality without measuring the cost. The baseline was meant to make budgeting transparent. Instead, it has made a certain kind of spending invisible. The question for the next fifty years is whether we can build a fiscal language that tells the truth about who benefits from the public purse—and who is left holding the bill.