'Tax' on Interest Deductions Gains Support

By Kenneth R. Harney
Saturday, October 13, 2007

Although the real estate industry opposes the plan, a key House committee leader's proposal for "carbon tax" cuts in mortgage interest deductions is attracting strong support from environmental and scientific groups.

Rep. John D. Dingell (D-Mich.), chairman of the House Energy and Commerce Committee, wants to phase out mortgage interest write-offs for houses larger than 3,000 square feet, using a graduated scale that ends at zero deductions for properties with 4,200 square feet or more.

Although Dingell said in a statement that he recognizes that new houses may be "more energy efficient" than older ones, "sheer size, sprawl and commutes lead to dramatically more energy use -- or to put it more simply, a larger carbon footprint."

In his latest draft of the plan, Dingell provides more detail about the housing-related tax elements than he did in earlier versions. The draft also offers limited exemptions from the phase-out, including for "historical homes" built before 1900, farmhouses, certified energy-efficient homes and houses whose owners purchase carbon offsets to make their properties "carbon-neutral."

Owners of homes of 3,000 to 3,199 square feet would be eligible for only 85 percent of the mortgage interest deductions they may now take. The bigger the house, the smaller the deduction: Homes of 3,600 to 3,799 square feet would lose 60 percent of the interest deductions, homes of 4,000 to 4,199 square feet would lose 90 percent, and homes of 4,200 square feet or more would get no deduction.

Mortgage interest write-offs are among the largest benefits in the federal tax code. The congressional Joint Committee on Taxation estimates that homeowners will take $402.7 billion in deductions from fiscal 2006 to 2010.

Some environmental advocates initially questioned Dingell's purpose in advancing an ambitious program to limit greenhouse-gas emissions -- he has been a staunch defender of the auto industry for years. But Dingell's plan would impose new taxes on gasoline (50 cents a gallon to start) and a $50-a-ton tax on coal, petroleum and natural gas in addition to the mortgage-interest-deduction clampdown.

Now a number of scientific and environmental organizations say Dingell's proposals represent a gutsy first effort not only to cut consumption of carbon-based energy products, but also to focus on energy use and efficiency in the residential arena.

Lexi Shultz, Washington representative of the Union of Concerned Scientists for climate policy, said, "The residential part of the [climate change] problem is very significant." It includes excessive carbon-based energy consumption in homes and exurban sprawl development of primary and secondary homes requiring long commutes and more highways.

Shultz's group favors taxes on energy consumption as a way to change behavior but also supports a companion "cap and trade" plan that sets specific carbon-reduction goals and auctions of "offsets" for industries and other large consumers of energy. Revenue from the auctions could be used to help low-income people and others who would be economically harmed by higher prices associated with carbon taxes.

Dingell's stated goal is to reduce U.S. carbon emissions 60 percent by 2050. Erich Pica, director of economic policy for the environmental group Friends of the Earth, said Dingell's plan "overall is good" and applauds its focus on residential real estate.

"The mortgage interest deduction was meant to be an incentive for people to buy and afford a home, but now we see it has significant energy impacts" -- subsidizing development of ever-larger first and second homes in subdivisions far from the urban core, Pica said. The choice of 3,000 square feet as a cutoff point "may be a little arbitrary," he said, but "the intent is right."

Charles Komanoff, co-director of the Carbon Tax Center, an energy policy research group, said, "We think Dingell's idea is terrific -- the carbon tax would give important incentives to minimize energy consumption" and would discourage sprawl over the long term.

Dingell has not yet introduced his legislation, key portions of which will be directed to the House Ways and Means Committee, which traditionally has supported tax benefits for housing. The National Association of Home Builders and the National Association of Realtors have criticized Dingell's plan as impractical and mistargeted at the square footage of residences rather than their measurable energy efficiency.

But Komanoff argues that the carbon tax will hit the correct target. "Big houses consuming lots of energy will pay more" than smaller, more energy-efficient homes, he said.

Environmental advocates say they recognize that Dingell's plans will be highly controversial among some of the biggest, best-funded lobbies on Capitol Hill. But they say that even if some portions of it fail in this Congress, growing public awareness of the effects of global warming -- and the key role played by housing and real estate -- will eventually help produce needed changes.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.

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