Greening the Home
Mortgage Deduction
November 11, 2005 — By Steven J. Moss, San Francisco Community
Power
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.
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Steven J. moss is the publisher of the Neighborhood
Environmental Newswire. He serves as Executive Director of San Francisco
Community Power,
www.sfpower.org. |