By Steven J. Moss President Bushâ€™s Advisory Panel on Federal Tax Reform recently called for dramatic reductions in mortgage interest and property tax deductions. This proposal will surely be greeted as one of the least popular ideas ever floated, right up there with eliminating federally-guaranteed social security payments or raising gasoline taxes. Thatâ€™s too bad, because this proposed reform is precisely whatâ€™s needed to cure a host of problems, including runaway housing prices, urban sprawl, and even global warming.
President Bush’s Advisory Panel on Federal Tax Reform recently called for dramatic reductions in mortgage interest and property tax deductions. This proposal will surely be greeted as one of the least popular ideas ever floated, right up there with eliminating federally-guaranteed social security payments or raising gasoline taxes. That’s too bad, because this proposed reform is precisely what’s needed to cure a host of problems, including runaway housing prices, urban sprawl, and even global warming.
Our existing tax policies encourage massive over-consumption of housing. Americans are building larger homes ”“ median square footage increased by almost seven percent over the last decade and half, while average family size slightly declined. Bigger houses mean more of everything ”“ greater amounts of materials, such as wood; and more energy-dependent devices, such as lighting, air conditioning, and heating. What’s more, these tax subsidizes are disproportionately provided to the rich; those making $200,000 a year or more.
The mortgage interest deduction was originally adopted to encourage home ownership. At this point it’s just as likely to have the opposite effect. The deduction subsidy “flow,” which results in a net decrease in annual housing payments, has almost certainly been fully capitalized into housing prices. That is, sellers can fetch a higher price for their property in part because higher costs are subsidized by the lower annual payments made possible by the tax benefits. Said differently, the deductions enable buyers to pay more for a home upfront, because they pay less in terms of their back end mortgage payments. And while sellers may reap a temporary windfall, unless they’re ready to downsize their living space they’ll simply have to reinvest their winnings into another over-priced home.
Of course simply slashing the deduction is neither good politics nor good policy. Congress would never pass such a measure, and if it did it would result in at least a partial collapse in the housing market, significantly reducing property values. However, a phased-in deduction-reduction, perhaps over thirty years, would soften the blow, and enable supply and demand to re-equilibrate, albeit at a lower overall value.
A new tax deduction policy should also include incentives to build more environmentally sustainable homes. For example, some banks offer lower interest rates if a property is located close-by transit, under the assumption that such locations reduce automobile dependency and associated transportation costs, thereby increasing an owner’s overall solvency. Similarly, greater deductions could be provided to homes located in high-density areas, as an anti-sprawl measure; and houses that include state-of-the-art energy efficiency features and solar panels, to combat global warming.
We spend almost $150 billion a year subsidizing home ownership. Much of this money is used to build an extra bathroom, guest room, or solarium in houses occupied by wealthy families. That’s not a good use of public dollars. Much better would be to use some of these funds to solve pressing environmental problems while reducing overall housing costs.
Steven J. Moss is the publisher of the Neighborhood Environmental Newswire. He serves as Executive Director of San Francisco Community Power, www.sfpower.org.