Three thousand square feet

That could be the threshold after which homeowners start to lose their mortgage interest deductibility. Michigan’s Representative John D. Dingell’s bill would:

Phase out the mortgage interest deduction on large homes.  These homes have contributed to increased sprawl and longer commutes.  Despite new homes in and of themselves being more energy efficient, the sheer size, sprawl and commutes lead to dramatically more energy use – or to put it more simply, a larger carbon footprint.

He has a point. This is an interesting interview with him at the WSJ.

Specifically, the proposal:

Phases out the mortgage interest on primary mortgages on houses over 3000 square feet.
Exemptions for historical homes (prior to 1900) and farm houses.
Exemptions for home owners who purchase carbon offsets to make home carbon neutral or own homes that are certified carbon neutral.

An owner would receive:
– 85% of the mortgage interest deduction for homes 3000-3199 square feet
– 70% for homes 3200-3399 square feet
– 55% for homes 3400-3599 square feet
– 40% for homes 3600-3799 square feet
– 25% for homes 3800-3999 square feet
– 10% for homes 4000-4199 square feet
– 0 for homes 4200 square feet and up

For a summary of the bill, go here.

Hmmm …

3,964 single family homes have sold in the region* since 1 January 2006. Of these, 667 are marked as being new construction. ** 166 have more than 3,000 finished square feet – nearly 25%. Nearly 25% of all new homes in the region would be affected in some way by this new bill.

Taxes are one of the most effective ways to influence public policy and citizen behavior. Rather than debate the intricacies of the bill, my question is this – is the premise correct? Should there be a consumption tax for those who choose to live in larger homes?

Is this the best way to influence change?

In researching this post, I came across something new – Location-Efficient Mortgages (hat tip:Climateprogress). Might Belvedere be a candidate for this type of mortgage?

The Location Efficient Mortgage®‚ (LEM) is a mortgage that helps people become homeowners in location efficient communities. These are convenient neighborhoods in which residents can walk from their homes to stores, schools, recreation, and public transportation. People who live in location efficient communities have less need to drive, which allows them to save money and improves the environment for everyone.

*Region = Charlottesville, Albemarle, Fluvanna, Greene, Nelson.
**New construction MLS data is notoriously unreliable, but does serve as a good guide

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  1. Ray Hyde October 8, 2007 at 09:25

    Where does the money for LEM mortgages come from? Altruism on the part of lenders? Do they think their risk is lower with these type homes? Or will government kick into the kitty somehow to actually pay for the benfit it recieves (less infrastructure costs, etc.)?

  2. Galen October 8, 2007 at 13:15

    This sounds like a good way to make paying your taxes even more complicated and a recipe for loopholes. If the Representative wants to cut sprawl, why doesn’t he do something about it like charging suburban and rural people for the highway additions needed to serve them? What about tolls? If it’s an energy saving thing, why not put a surcharge (tax) on all energy and use the gains to cut taxes for the poor?

    Sounds like a bad idea!

  3. Dave Phillips October 8, 2007 at 17:20

    It is more than a little ironic that a politician from the state with the most depressed housing market and the state that produces the biggest gas guzzling cars has a plan to try to change the behavior of people’s sprawl tendencies. This plan is so silly it is not worth commenting on, so I’ll stay focused on Jim’s question – are taxes the best way to effect change? I think they are the best method that government has to effect change. I think tax incentives are better than tax penalties. IRA’s have been effective in encouraging saving where luxury taxes have only had a short-term effect in most cases. Luxury taxes simply temporarily raise the stakes and then people just find a way to make more money.

  4. Jim Duncan October 9, 2007 at 08:58

    Thanks everybody for the comments.

    A couple of things – if a lender could verify that someone was walking or biking to work, theoretically that buyer would have less monthly costs – fuel, auto maintenance, etc. and would be less risky … maybe.

    As far as simplifying taxes, I have long advocated the FairTax as the best way to go … tolls, use taxes, etc.

    I think that his concept, at least in his mind, is pure – if one wants a larger home, they should pay for it. However, the necessary complication from implementing this tax necessarily makes it unruly. Additionally, it would serve to expand the government’s role even more. Again, FairTax.

  5. Ian October 9, 2007 at 21:41

    While many who are invested in the current income tax system seek to demagog the well-researched FairTax plan (1), FairTax’s theoretical underpinnings have been professionally reviewed (2), and its acceptance in the professional / academic community continues to grow (3).

    Renown economist Laurence Kotlikoff believes that failure to enact the FairTax – choosing instead to try to “flatten” what he deems to be a non-flattenable income tax system – will eventuate into an irrevocable economic meltdown (4) because of the hidden aspects of the current system that make political accountability impossible. Tom Frey, of the DiVinci Institute, foresees the coming collapse of the income tax system (5).

    Here is why the FairTax MUST replace the income tax. It’s:

    • SIMPLE, easy to understand
    • EFFICIENT, inexpensive to comply with and doesn’t cause less-than-optimal business decisions for tax minimization purposes
    • FAIR, loophole free and everyone pays their share
    • LOW TAX RATE, achieved by broad base with no exclusions
    • PREDICTABLE, doesn’t change, so financial planning is possible
    • UNINTRUSIVE, doesn’t intrude into our personal affairs or limit our liberty
    • VISIBLE, not hidden from the public in tax-inflated prices or otherwise
    • PRODUCTIVE, rewards, rather than penalizes, work and productivity

    Its benefits are as follows:

    • No more tax on income – make as much as you wish
    • You receive your full paycheck – no more deductions
    • You pay the tax when you buy “at retail” – not “used”
    • No more double taxation (e.g. like on current Capital Gains)
    • Reduction of “pre-FairTaxed” retail prices by 20%-30%
    • Adding back 29.9% FairTax maintains current price levels
    • FairTax would constitute 23% portion of new prices
    • Every household receives a monthly check, or “pre-bate”
    • “Prebate” is “advance payback” for taxes payable on monthly consumption to poverty level
    • FairTax’s “prebate” ensures progressivity, poverty protection
    • Finally, citizens are knowledgeable of what their tax IS
    • Elimination of “parasitic” Income Tax industry
    • Those possessing illicit forms of income will ALSO pay the FairTax
    • Households have more disposable income to purchase goods
    • Savings is bolstered with reduction of interest rates

    • Corporate income and payroll taxes revoked under FairTax
    • Business compensated for collecting tax at “cash register”
    • No more tax-related lawyers, lobbyists on company payrolls
    • No more embedded (hidden) income/payroll taxes in prices
    • Reduced costs. Competition – not tax policy – drives prices
    • Off-shore “tax haven” headquarters can now return to U.S
    • No more “favors” from politicians at expense of taxpayers
    • Resources go to R&D and study of competition – not taxes
    • Marketplace distortions eliminated for fair competition
    • US exports increase their share of foreign markets

    For the COUNTRY:
    • 7% – 13% economic growth projected in the first year of the FairTax
    • Jobs return to the U.S.
    • Foreign corporations “set up shop” in the U.S.
    • Tax system trends are corrected to “enlarge the pie”
    • Larger economic “pie,” means thinner tax rate “slices”
    • Initial 23% portion of price is pressured downward as “pie”
    • No more “closed door” tax deals by politicians and business
    • FairTax sets new global standard. Other countries will follow

    (1) (.pdf)
    (2) (.pdf)
    (3) (.pdf)

    It’s well past time to scrap the tax code ( ) and pay for government the way that America’s working men and women are paid – when something is sold.

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