News Details (Posted: August 27, 2007):

A Cut-off of the Mortgage Interest Deduction for Big Houses?

Full Description:

An influential committee leader in the House of Representatives is planning a post-summer surprise for millions of Americans whose houses contain 3,000 square feet or more of interior space: A proposal to take away their mortgage interest deductions.

Calling homes of that size "McMansions," Rep. John D. Dingell (D-Mich.), the 15-term veteran at the helm of the House Energy and Commerce Committee, is now drafting "carbon tax" legislation that would deny owners their mortgage writeoffs.

Though details of the proposal won't be available until the draft is completed next month, say aides, the bill is expected to also call for higher federal gasoline taxes and a variety of other provisions designed to discourage carbon emissions into the atmosphere. The goal, said Dingell in talking points prepared for town hall meetings in Michigan, is to reduce total carbon emissions into the atmosphere in the U.S. by 60 to 80 percent by the year 2050.

Big houses, say environmental critics, consume outsized amounts of energy for electricity, heating, air conditioning, and construction materials. Subdivisions of new houses also contribute to so-called greenhouse emissions by stimulating far-flung subdivions, urban sprawl, long commute times, and traffic congestion. In his talking points, Dingell said his forthcoming legislative proposals will "impose a stiff tax on carbon, increase the tax on gasoline, and remove the mortgage interest deduction on 'McMansions,' -- homes over 3,000 square feet."

"In order to address the issues of climate change," according to Dingell, "we must address the issue of consumption -- we do that by making consumption more expensive."

Dingell's plans aren't going over well among real estate and housing groups. Bill Killmer, an advocacy official for the National Association of Home Builders, said his group takes "any proposal by Chairman Dingell seriously because of his impressive record of legislative accomplishments" over the past three decades. However, penalizing square footage—rather than actual energy usage—is "wrongheaded," said Killmer.

Top staff members at the National Association of Realtors challenged the idea that all houses above 3,000 square feet constitute "McMansions," and warned that withdrawing tax benefits would lead to property value declines across the market spectrum. Lawrence Yun, NAR senior economist, estimated that Dingell's plan would cause average price declines of 4 percent at every level, from large, high-cost houses to small starter homes.

Yun estimates that roughly 10.4 million single family houses in the U.S. contain 3,000 square feet or more, and represent 27 percent of the total valuation of single family owner-occupied units. Yun said ending the interest deduction could make houses less affordable and even lead to higher rates of foreclosure -- possibly adding another 280,000 foreclosures to current high totals.

Linda Goold, tax counsel for NAR, questioned the practicality of raising taxes for homes based on square footage and an arbitrary cut-off point of 3,000 square feet. "Who is going to do the measurements?" she asked, noting that most MLS listings refer to "approximate" square footage because different people may measure the same house differently.

The mortgage interest deduction is deeply ingrained in the housing market, and represents a major federal tax benefit designed to encourage ownership. According to estimates from the Congressional Joint Committee on Taxation, upwards of $403 billion in foregone revenues to the federal Treasury from fiscal 2006 through fiscal 2010 will be attributable to mortgage interest deductions by homeowners.

When Dingell's tax plans are unveiled after the congressional summer recess, they will need to be referred -- at least in part -- to a committee where Dingell's clout on energy and commerce matters does not necessarily extend: the House Ways and Means committee, chaired by another veteran Democrat, New York's Rep. Charles Rangel. Rangel has not yet commented on the Dingell plan, but is generally believed to be a supporter of continuing homeownership tax benefits in their current form.

by Kenneth R. Harney