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….
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.
Home mortgage interest deductions have to be one of the most popular government incentives out there, so Moss is certain to ruffle some feathers with this proposal. At the same time, he’s shown yet another example of how our “growth is good” economic mindset reaps some pretty poor environmental dividends.