October 16, 2007

Congressman John Dingell Has a Good Idea

So, as we've discussed here, there's been some controversy surrounding Rep. John Dingell's proposal to enact a carbon tax that will raise the cost of gasoline by 50 cents a gallon. Dingell, who represents a lot of automotive workers in the Detroit area and chairs the House Energy and Commerce Committee, has in the past largely opposed proposals that would restrict oil consumption in any way. For example, he prevented enhanced fuel efficiency standards for automobiles from making their way into the energy legislation recently passed by the House.

So many observers, including Hill insiders that I've spoken with, are convinced that Dingell's proposals are actually attempts to drum up opposition to any sort of carbon tax, which would allow him to turn around and say, "Well, look we tried, but clearly America doesn't want a carbon tax."

But some are starting to think Dingell may actually want to do something productive, and, as the Washington Post reports, some of his ideas are catching the attention of environmentalists. His idea to end the home mortgage interest deduction for houses that are larger than 3,000 square feet is an excellent idea.

To begin with, the home mortgage interest deduction is itself a poor policy. It's only available to those who itemize, and most low-income taxpayers do not. And for those who do itemize, the deduction provides a bigger benefit for those who are in a higher tax bracket or who buy a more expensive house.

Can you imagine Congress saying it wants to hand checks to people to buy a house, and the richer they are and the bigger the house is, the more they get? That's what we're essentially doing through the tax code. The fact that it takes the form of a tax break instead of direct spending means very little since it still results in a revenue reduction that we all pay for in higher taxes or fewer public services.

Now, a reasonable person could argue (although I wouldn't) that some sort of government subsidy to encourage home ownership is appropriate, although it's unclear that this benefit goes entirely to home owners rather than the real estate or construction industries. But at very least we should be able to agree that people buying houses of over 3,000 square feet don't need the full tax break.

Dingell's proposal would reduce the tax break for houses over that threshold and remove it totally for houses that are 4,200 square feet are larger.

Larger houses use more energy. It's true that all sorts of things can make a house energy efficient besides just its size, but apparently Dingell's proposal would make an exception for "certified" energy efficient homes.

This is actually one of the fairer ways to tax energy consumption when you think about it. The problem with a lot of plans to tax energy use is their regressivity.

Here at Citizens for Tax Justice, we cast a very suspicious eye on any proposal that would make our tax system more regressive. A tax on energy consumption, like any consumption tax, is inherently regressive because it takes a larger bite proportionally out of a poor family's income than it does of a rich family's income.

(But note that there are proposals that would reduce the regressive nature of a carbon tax. Whether these policies can truly target relief to the people low-income families who end up paying is debatable.)

A rich family can afford to invest most of its income, whereas poor families tend to buy the things they really need, like gas, food and housing, and then don't have anything left over to save or invest. So low-income families consume most of their income, and likely a larger portion goes towards gasoline. And besides that, a lot of working-class families have already purchased homes that are far from their place of work and far from the nearest grocery store. It would be difficult for them to all move now.

But notice how ending the mortgage interest deduction for McMansions really doesn't create all these difficulties. For one thing, it only affects the affluent. For another, it really only taxes future behavior - buying a new house. A gas tax, on the other hand, really taxes behavior that people have already locked themselves into (since families have already purchased homes far from work and shopping areas and cannot easily move).

Now I suppose ending the deduction for McMansions could indirectly tax some people who are locked into a position they cannot quickly change. Those people who already live in McMansions could have a harder time selling them. But so what? That's better than the regressive impact of a gas tax that hits the poor the hardest.

I would even argue that this limit on the home mortgage deduction could be a lot stronger. Dingell himself has alluded to the fact that large houses often increase global warming in two ways when he says that "sheer size, sprawl and commutes lead to dramatically more energy use -- or to put it more simply, a larger carbon footprint."

The first way McMansions contribute to global warming is just the fact that larger houses require more energy to heat and cool. The second is that building these huge houses, in the aggregate, leads to neighborhoods that are more spread out than neighborhoods of the past and which require a lot more driving to get anywhere. But this second problem would really be solved if you also limited the lot size for which the deduction is available. I haven't heard anyone talk about that though.

Well, at very least, we should stop handing out tax breaks for people who want to move into McMansions. It really ought to be a no-brainer.

Bush Realizes that Spending Must Be Paid For

President Bush spoke in Rogers, Arkansas, yesterday on the battle with Congress over discretionary spending bills and the expansion of the State Children's Health Insurance Program (SCHIP). Virtually every word the President uttered during his speech was absolute nonsense. Let's go down the list.

"The worst thing we could do is run up taxes as this economy is growing."

So he says the tax cuts need to stay in place when the economy is growing. He also used to say that the tax cuts were needed when the economy was not growing, because tax breaks (which will mostly benefit the
richest 5 percent of Americans by 2010) will get the economy going again. He also said that when we had a budget surplus it was important to have tax cuts to give the money back to the people. And when his tax cuts sank us deep into deficits, he said it was important to have tax cuts because they actually increase revenues (even though economists in his own administration say that's not true). I guess you could say the man stays on message, at least.

"And yet when you listen carefully to the budget debate, that's what you're fixing to get stuck with -- a tax raise. Unless, of course, I prevent them from raising your taxes, which I fully intend to do."

He insisted that the Democrats' desire for (slightly) higher discretionary spending would lead to higher taxes. It's interesting that this President would even admit that spending money means you have to pay for it. Well, that's self-evident to most of us, but in conservative circles that has been denied since the very beginning of the Bush administration. After all, enacting deficit-financed tax breaks and fighting a deficit-financed war wouldn't be a winning policy if we had to actually, you know, pay for those things. If we have to actually pay for deficit-financed tax cuts later on, with interest, well, then they wouldn't really be tax cuts at all, would they?

But anyway, back to the question of whether the Democrats are actually calling for a tax increase. The discretionary spending that the Democrats are asking for fits within the budget resolution that they passed back in the spring, which balances the budget over five years. That budget does assume that some of the Bush tax breaks should be allowed to expire. But those tax breaks should be allowed to expire (actually they should be repealed early as far as I'm concerned) because they've made our tax code less progressive and cost around a
trillion and a half dollars.

"The other historic fact was that our deficit as a percent of GDP is at 1.2 percent."

There are many reasons why the budget situation actually really bad. For one thing, the full effect of the Bush tax cuts will be felt only in 2010, when the estate tax is fully repealed at a huge cost, and if the President and his allies have their way in making all the tax cuts permanent the deficit is
likely to grow over the next ten years. Beyond that, the cost of health care is rising, pushing up the costs programs like Medicare and Medicaid (not to mention straining families and businesses) and the administration has done nothing to address that.

And as the baby boomers retire, they will place new demands on the Social Security system, which is not in particularly grave danger itself but which would be less of a concern if we had actually saved the Social Security surpluses instead of blowing them on tax cuts and military spending during the Bush years.

"Every program sounds like a great program, but without setting priorities the temptation is to overspend. The job of the President is to make sure that we don't overspend, and at the same time keep taxes low."

You would think this President would be afraid of people focusing on priorities. This is a President who spent a trillion and a half dollars on tax cuts over six and a half years but refuses to spend an additional $35 billion over five years on health care for children. This is the same President who has spent something like
$460 billion in Iraq. As others have pointed out, the $22 in discretionary funding is awfully trivial compared to the overall budget and compared to the President's own priorities, like tax breaks for the rich and the war in Iraq.

"They want the executive branch to accept an increase in spending over the next five years to $205 billion. Put that in perspective, that's $1,300 in new spending every second of every minute of every hour of every day of every year for the next five years."

You might be wondering how the President can claim that increasing discretionary spending by $22 billion this year, which is what this whole fight is over, would cost $205 billion over five years. The Center on Budget and Policy Priorities
explains it all. Basically, there are some programs for which Bush wants to hold spending below what's needed to account for inflation and population growth over the next five years (which is a fancy way of saying Bush wants to slowly cut these programs over five years) and the Democrats disagree with him on this. So the overall difference is between where Bush and the Democrats are over this five-year period is $173 billion, and then the White House uses some other accounting malarkey to get that number up to $205 billion over five years.

And then of course there's the fact the President seems to be conceding that all the spending actually must be paid for, which is something new for him, as I've said.

"I think that would be bad for the economy."

Remember when, during the Clinton years, taxes were raised and we actually paid for all of our public services? Remember how that triggered a massive economic downturn... oh, wait, I was reading Republican talking points from 1993, sorry. I forgot that the 1990s actually saw phenomenal economic growth and prosperity.

"Not one bill has come out of United States Congress that appropriates your taxpayers' money."

Well of course Congress is pathetically slow, why should that change now? The President's own party demonstrated this with its
inability to even agree on a budget last year, not to mention its inability to get appropriations bills passed.

"The [SCHIP] bill sent to me didn't say, we're going to focus on those half-million that are eligible; the bill sent to me said, we can expand eligibility for the program up to $83,000."

Here's part of a
response from Families USA:

* Claims by the President that this bill raises the CHIP eligibility level to $83,000 (400 percent of the federal of the poverty level) in annual income are unambiguously false. There isn’t a single state in the country with such a high eligibility level. One state, New York, wanted to set the eligibility standard at that level, but its request to do so was denied by the Administration.

* The CHIP bill will make it more difficult for states to set eligibility levels above 300 percent of poverty (approximately $62,000 in annual income for a family of four). States wishing to establish higher levels would receive less money for children with incomes above 300 percent than for lower-income children.

* The vast majority of the 3.8 million children who will gain coverage under this bill—more than 75%—have incomes below twice the poverty level. That’s $41,300 for a family of four.