Wednesday, April 9

Another reason to scrap the HMID

I've spent a couple of posts reflecting on the damage done by the IRS home mortgage interest deduction. This extremely regressive tax deduction is essentially a form of corporate welfare for the real estate and construction industry. It also wrecks the environment by encouraging mansions and huge yards. But these not the only problems. I picked up on another negative consequence of this policy while listening to a tribute to Jane Jacobs on the Open Source radio show.

This generous tax deduction encourages households to put an inordinately high proportion of their assets into their home (or a second home). While normally the rational financial behavior is to diversify investments as much as possible to protect them from any single market problem, thanks to this deduction most middle-income Americans end up essentially putting all of their eggs into the one basket of their home.

The trouble is that a single house is actually a pretty risky investment. This makes people very protective of their nest egg. A few too many of the "wrong people" in the neighborhood or a well-placed convenience store could send their investment into a downward spiral, so they react by imposing rigorous exclusionary zoning laws or fighting tooth and nail with city council over anything that could disrupt the value of their home. The end result is a series of residential districts highly segregated according to real estate value. This is the antithesis of healthy urbanity.

Nobody is suggesting that an elimination of the HMID will end the practice of Nimbyism (Not In My Back Yard) altogether, but it at least could lower the stakes a little. If investments are more carefully diversified, as they naturally would be, then homeowners will not have to see any little infraction in their neighborhood as a threat to their entire financial well-being. It could infuse a little sanity back into process of land use planning.

1 comment:

wild chicken said...

The least they could do is drop or prorate the deduction for people getting tax money to "save" their homes from foreclosure.