TAX NEWS - June 2010

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Rating the Tax Code's Green Performance

Our trusty panel of Homer Simpson, Gordon Gekko (Best known for his line in the movie Wall Street - "Greed is good.") and Henry David Thoreau reconvenes for a look at the performance of the U.S. Tax Code from a green perspective, inspired by Professor Roberta F. Mann's article Back to the Future: Recommendations and Predictions for Greener Tax Policy from The Oregon Law Review, Vol. 88, p. 355 (2009).

Homer: What's this green perspective stuff all about, are we supposed to be wearing sunglasses?

Henry: No Homer, green as in sustainable, ecological - what should we be doing with the tax code to make sure the planet is still here for our grandchildren.

Gordon: That's right Homer, it's amazing how much taxes influence performance and behavior, why even Congress sometimes figures it out - tax incentives for renewable energy sources finally passed those for non-renewables and..

Henry: Why don't I take the lead on this one, Gordon. After all, I actually pay my taxes, you just seem to come up with a new set of loopholes every year.

Gordon: Suit yourself Henry, but when you're talking about greening the tax code, loopholes are what performance is all about.

Henry: If, by loopholes, you mean tax expenditures, then you are probably right.

Homer: It's always an expenditure when I pay taxes, where's the loophole in that?

Henry: A tax expenditure is the amount of revenue loss attributable to a special deduction, credit, exclusion, etc. which is deliberately inconsistent with the general approach of the tax code. For example, interest on loans to buy cars, furniture, or any other personal item is not deductible, but interest on a home loan is deductible. So mortgage interest is a special deduction, and the result is an $80 Billion per year loss of tax revenue, which is a tax expenditure, and, in essence, a Federal subsidy for homeowners and, indirectly, the housing industry.

As long as we're talking about housing, let's start there with our green look. What kind of performance do we get for that $80 Billion subsidy, via the mortgage deduction, plus the special exemption from tax on gain on sale of a principal residence ($16 Billion annual tax expenditure), property tax deduction (another $16 Billion), first time home buyer credit ($13.6 Billion) and some direct assistance? Not much green. The deductions are structured so that the bigger the house you buy, the more deduction you will get for mortgage interest and property tax. Essentially, the tax code encourages McMansions built in sprawling suburbs. Although credits have been proposed as an alternative to the mortgage interest deduction (eliminating the tax advantage of the rich over poor and the incentive to build ever bigger) the deduction is a sacred cow. The result is ever increasing home size. Fortunately, improved energy efficiency (spurred, in part, by tax credits) has off set some of the size factor, but seriously - big homes filled with few people built in towns that are off the public transportation map - hasn't Congress ever heard of climate change?

Gordon: There are lots of voters with a lot invested in their homes, decisions they made thinking the mortgage interest and property tax deductions would be around forever. If you are serious about changing these, Henry, you better come up with some transitional relief for people who are already homeowners - like a very slow phase in of any changes, then maybe Congress could get something done. Sometimes you need to be practical to go green.

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