Tax Deduction Under Fire for 'McMansions'

By Kenneth R. Harney
Saturday, August 25, 2007

To add to the mortgage meltdown miseries, the credit panic, the plunging home sales and the rising foreclosures, here's a new worry: a proposed cutoff of mortgage-interest tax deductions for houses with more than 3,000 square feet.

One of Capitol Hill's most experienced and most powerful legislators is drafting a "carbon tax" bill that would do precisely that. The chairman of the House Energy and Commerce Committee, John D. Dingell (D-Mich.), expects to introduce comprehensive climate-change legislation when Congress returns next month.

Besides imposing hefty new federal taxes on gasoline, the forthcoming bill would, in Dingell's words, seek to "remove the mortgage interest deduction on McMansions -- homes over 3,000 square feet." Dingell said he recognizes that such a proposal will spark much criticism, but he also said it is essential to reducing carbon emissions by 60 percent to 80 percent by 2050.

"In order to address the issue of climate change, we must address the issue of consumption," Dingell said in talking points prepared for town-hall discussions of the legislation. "We do that by making consumption more expensive."

Houses, like autos, are contributors to greenhouse-gas emissions. This is through heating, cooling, electrical usage and building materials, plus the highways and roads needed to make far-flung subdivisions accessible to buyers. Home builders insist that they have "gone green" in recent years and that houses constructed within the past decade are the tightest, most energy-efficient in history.

Aides to Dingell said that because the legislative language on large houses and other tax proposals is still being drafted, neither they nor the congressman could elaborate on the details of the plan or why the cutoff point of 3,000 square feet was chosen. The Natural Resources Defense Council, one of the most outspoken environmental lobbies in the climate-change debate, had no immediate comment on Dingell's proposal.

But real estate and building groups were quick to offer critiques. Lawrence Yun, senior economist for the National Association of Realtors, produced preliminary estimates that ending mortgage-interest tax deductions for all single-family dwellings larger than 3,000 square feet would result in a national median-house-price decline of 4 percent on all homes, not just large houses. Yun said there are at least 10.4 million single-family houses with interior areas of 3,000 square feet or more, about 15 percent of the nation's owner-occupied housing stock.

Dingell's plan could also push up foreclosures because every 1 percent decline in median price leads to an additional 70,000 foreclosures, Yun said, citing industry research. A price decrease of 4 percent in a national market already swamped with foreclosures could add 280,000 to the total.

Linda Goold, the NAR's tax counsel, challenged the Dingell plan on operational grounds. "We strongly support increasing energy efficiency in houses, but basing [taxation] on square footage rather than actual energy usage doesn't make sense," she said.

Goold also questioned the enforceability of a federal tax increase tied to the dimensions of structures. "Who is going to do the measurements?" she said. "Different people measuring square footage can come up with different numbers. That's why MLS [multiple listing service] listings usually say the square footage is approximate."

Bill Killmer, policy advocate for the National Association of Home Builders, called the Dingell plan "wrongheaded" in its focus on house size.

"We believe a much better approach would be to look at consumer behavior -- how efficient are the appliances they've installed, how energy-efficient are the windows, insulation, heating and air conditioning" and other systems, he said.

The interest deduction is one of the biggest tax benefits in the federal budget, according to the congressional Joint Committee on Taxation. From fiscal 2006 to 2010, according to a committee study, federal revenue losses attributable to the mortgage interest deductions are expected to total $402.7 billion. Other federal studies have documented that the benefits of the write-off are heavily skewed toward higher-income taxpayers who have larger-than-average mortgages.

Over the past two decades, occasional proposals have been made in Congress to rein in the deduction -- say, by limiting it to mortgage amounts of less than $300,000. But the write-off has never been seriously endangered because it is so popular with taxpayers and has fierce support in the banking, real estate and construction industries.

Nonetheless, Killmer said his trade group takes "any proposal from Chairman Dingell very seriously because of his impressive record of legislative accomplishments." .

"The [environmental] problem he is trying to solve is important -- nobody questions that," Killmer said. "We just don't think this is the right way to go about it."

Kenneth R. Harney's e-mail address is

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