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.


4 Comments:

At 3:50 PM, Blogger Andrew Oh-Willeke said...

Limiting the mortgage interest deduction in some way is a good idea, but a square footage approach has myriad incentives, not all good.

For example, it encourges the rich to live in downtown Penthouses and Brownstones, rather than suburban McMansions, so that they can maximize their deduction.

It also leads to a whole maze of regulations involving counting square feet that encourage "very comfortable" patios, courtyards, garages, gazebos and roof decks.

A multiple of average housing prices in a state as a cap and eliminating the second home deduction would make more sense.

 
At 3:50 PM, Blogger Andrew Oh-Willeke said...

Limiting the mortgage interest deduction in some way is a good idea, but a square footage approach has myriad incentives, not all good.

For example, it encourges the rich to live in downtown Penthouses and Brownstones, rather than suburban McMansions, so that they can maximize their deduction.

It also leads to a whole maze of regulations involving counting square feet that encourage "very comfortable" patios, courtyards, garages, gazebos and roof decks.

A multiple of average housing prices in a state as a cap and eliminating the second home deduction would make more sense.

 
At 9:24 AM, Blogger Dan said...

I agree that it should be a no-brainer that the government shouldn’t be handing out tax breaks to those people building or moving into McMansions.

Your argument re “the regressive impact of a gas tax that hits the poor the hardest” is less persuasive. First, it’s not true that a gas tax “really taxes behavior that people have already locked themselves into.” People periodically buy cars and can adapt to a gas tax by making sure the next car they buy is more efficient. In addition, they can change their driving habits by taking public transportation when available, car pooling when feasible, linking errands rather than using more gasoline making many separate trips. While most homeowners or renters are not likely to move simply to reduce their commuting costs, many people move relatively often and future decisions about home ownership or rental will be made with an awareness of the commuting cost implications. That may well have an impact on where new single and multi-family homes are built.

Second, while consumption taxes are regressive, note that low-income families use far less energy than those with higher incomes. {Quote from web site} With a properly designed revenue-neutral carbon tax shift, many low-income families will come out ahead. Third, a gasoline tax should be phased in gradually so that consumers have the opportunity to adapt their consumption habits.

Of course, there is no reason to stop with a gasoline tax. A carbon tax would be far more effective at reducing carbon dioxide emissions, since elasticities for other forms of energy use are greater than for gasoline.

Critically important, a carbon tax, or gas tax, should be designed to be revenue-neutral. See the Carbon Tax Center proposal at http://www.carbontax.org/issues/softening-the-impact-of-carbon-taxes/. We would welcome the support of Citizens for Tax Justice on this point.

 
At 8:46 PM, Blogger Kyler said...

What most people fail to realize is the true potential of the gasoline tax. Yes it will hurt the lower income families the most and very little can be done to prevent that. The mere proposal of this tax is already causing rapid changes in fuel prices as well as consumer's desire for more fuel efficient cars.

I feel that the true purpose for the tax is as Dan said to make peoples driving habits as fuel efficient as possible and to increase their interests in buying more fuel efficient cars. More demand for these vehichles will drive the price down and make the once considered luxury of a hybrid car available to everyone. That change is already taking place, price lists for 2008 hybrids are significantly lower (As low as 22,000 for Toyota Prius and Honda Civic hybrids) than previous years.

 

Post a Comment

<< Home