Stop the Debt Limit Madness

I would not usually comment on the alleged deficit debate — built around a ginned-up debt-limit-raising “crisis.” But it has move to a new level of fantastical unreality as it allegedly reach its endgame. The conservative radicals in Congress want tax breaks off the table even though many are really juicy targets. Democrats have succumbed to the fallacy that hacking debt now is more essential than creating an economy that generates jobs and wealth.

The radicals argue that huge chunks of what Congress allocates in the budget is wrong, wasteful, and bloated, while tax cuts and tax breaks are perfect, sensible, not to be tampered with. That’s not what they say, but when you take the Democrats euphemistic “revenue raising” off the table, that’s what it boils down to.

Here’s the choicest of wasteful tax goodies in the housing sector alone. They are far from the only ones but these I know well. If you want chapter-and-verse about how and why they are dysfunctional, have a look at Part 2 of The Agile City, my book just published by Island Press.

 

1. •Cap or eliminate the deduction for mortgage interest on owned homes. This is a very expensive sacred cow, and is costing the treasury close to half a trillion dollars over five years (Congressional Joint Committee on Taxation figures). The deduction goes overwhelmingly to the most affluent owners and there is little evidence for social or economic benefit.

1. •Cap or eliminate the deduction for property taxes on the owned home. Similarly there is little documented benefit for this special tax treatment. Its five-year cost is $121 billion.

1. •Eliminate the deduction for home-equity loans. That will put a stop to the habit of using paper equity for ready cash, which helped power the housing bubble. A deduction for loans that apply for capital maintenance or energy-conservation investments would spur job creation and energy independence.

1. •Eliminate the capital-gains forgiveness on sale of a home. This is a relatively recent, and costly deduction, with an $86-billion five-year cost. In the housing bubble, the capital-gains giveaway encouraged people to think of their houses as investment vehicles rather than places to live.

• Phase out deductions for vacation homes. When America is not adequately housing people with severe needs, it cannot afford to underwrite luxe digs on beaches and in mountains. Such a move would reward modest getaway—which is what an environmentally and economically efficient lifestyle and economy demand.

Taken together these goodies will cost the treasury $134 billion this year alone. That’s a big chunk of the deficit problem, and a couple of lawmakers have actually dared question these benefits.

The dubious value of these tax goodies could be balanced out by more productive and lower-cost investments. Vouchers and housing-construction support could help people living in cars, on the streets, or doubled-up with relatives who can’t support them. That’s the unserved market. That would be something of real benefit lawmakers could focus on.