Tuesday, November 01, 2005

Bringing down the house

Pittsburgh's leading policy wonk Fester discusses the proposal to reduce the cap for the mortgage interest federal tax deduction in order to eliminate the alternative minimum tax. Fester favors the idea because the deduction leads to overinvestment in the housing market, but he feels it is a political nonstarter because it will cause too much short-term pain.

I tend to agree on both counts. I think the deduction as it currently stands is an indirect cause of sprawl, as it encourages people to build new homes rather than rehab older ones, and it allows people to build bigger homes on bigger lots than they could otherwise afford. But it has a huge political constituency that would mount a hell of a fight to keep the ceiling where it is.


Blogger fester said...

Jonathan --- first thank you for the compliment, but I am no where near the leading wonk in town, I am just the leading blogging wonk --- massive difference. If you want to see some influential wonks, go down to Hamburg Hall during lunch or Craig Street for coffee.

Secondly, I am not so sure if the deduction directly encourages sprawl on the grounds that you advance in that rehab that is financed through refinancing of mortgages, or a second mortgage also qualifies for the same deduction. I will easily accept the argument that the deduction encourages overbuilding and that the other tax expenditures, legal liability, externality payment and policy conditions, and cost factors strongly encourage marginal development to be spawl based development, but the direct cause is not there in my opinion.

10:42 AM

Blogger Jonathan Potts said...

I said it was an indirect cause, not a direct cause. I understand what you are saying about the borrowing people do to rehab old houses. But on balance it still is cheaper than buying a new home. And for that matter, all other things being equal, older homes in decent condition still are often less expensive than new construction.

6:48 PM


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