Saturday, February 7, 2009

Senate’s Tax Credit Favors Higher-Income Homebuyers

By Ryan J. Donmoyer on Bloomberg:

The U.S. Senate is working to boost home purchases among six-figure-income households, turning away from Bush administration policies that helped fuel a property bubble.

By replacing a $7,500 tax credit for first-time homebuyers earning less than $150,000 with a $15,000 break for all income groups as part of the economic stimulus package, senators are encouraging purchases by higher-income households with a reduced risk of default.

A sponsor of the measure, Republican Senator Johnny Isakson of Georgia, said the credit is aimed at helping restart the stalled housing market. It would do so without the “far too loosey-goosey” underwriting standards of recent years that spurred an explosion of defaults by unqualified borrowers, he said.

“By doing it the way we did, people making $120,000 are more likely to be motivated to buy a house,” Isakson said.

Unlike the current law, the $35.5 billion provision wouldn’t be restricted to first-time homebuyers. It also would end homebuyers’ ability to claim the full credit if it exceeds the amount they owe in taxes.

The effect would be to wipe out the $15,000 of income tax a family of four earning about $122,000 would otherwise owe this year if they bought a house. A family earning half that amount would get about $2,300 less in tax benefits for buying a home than they would under current law.

Stimulus Package

The Senate credit, approved Feb. 4, is included in a broader $780 billion stimulus package the chamber may vote on Feb. 10. The provision faces an uncertain future because it would have to win support in the House of Representatives to be included in the final economic stimulus plan. If enacted by Congress, it would take effect the day President Barack Obama signed it into law. Obama, 47, said this week in an interview with Fox News that tax cuts for people who buy homes or businesses “has some potential and I’m willing to take a look at it.”

Some lending experts said it isn’t clear whether the tax credit would jumpstart the housing market, especially while the broader economy is still in recession.

Concerns on Economy

“There are stronger forces at work here,” including fears about the economy, fears that housing prices remain too high, and expectations that Congress may still subsidize mortgage rates, said Ricardo Kleinbaum, a credit analyst at BNP Paribas in New York. “If you can’t afford a house today, it’s not going to make much of a difference.”

The credit, which is worth the lesser of $15,000 or 10 percent of a house purchase price, was added to the stimulus bill along with a break to spur car purchases. That provision gives a credit to people who have bought a new car since Nov. 12, 2008, or buy one before Dec. 31, and also gives the biggest savings to higher-income earners.

The Senate-passed credit for homebuyers, unlike the existing $7,500 credit, isn’t refundable, which means house purchasers who owe less than $15,000 in federal income tax won’t get the full benefit in a single year.

Instead, the Senate provision would allow homeowners to split the $15,000 into two separate tax credits of $7,500 to be taken in successive years. To pay $7,500 in federal taxes, a family of four would have to earn about $92,125, according to Internal Revenue Service tax tables.

No Refund

Lower-income people whose taxes over two years don’t total $15,000 won’t get the full benefit and in many cases would get a better deal under current law, which requires the government to send a check for the difference between taxes paid and the $7,500 credit.

Under existing law, the $7,500 has to be repaid. The Senate bill wouldn’t require the $15,000 credit to be repaid. In its version of the economic stimulus bill, the House agreed only to waive the repayment requirements, though it left the refundable credit at $7,500 and preserved income limits for eligible users.

Roberton Williams, a senior fellow at the Urban-Brookings Tax Policy Center in Washington, said the new housing credit would stabilize housing prices, though he questioned whether such intervention is necessary.

“This is saying we’re going to put a floor underneath how far housing prices are going to fall,” Williams said. “It may well induce a lot of people to buy houses who otherwise might not have,” he said.

‘Awful Lot of Money’

At the same time, Williams said, the measure may not have a big effect because a large number of people would still buy a house even without the benefit. “If they’ve really given it to everybody then its spending an awful lot of money on activities that will already happen,” he said.

Stephen Fuller, a housing economist at George Mason University in Fairfax, Virginia, said the credit is similar to a $5,000 break enacted in 1975 for buyers of newly constructed, never-occupied homes that reduced backlogged housing inventories to the point where demand for new construction was stimulated.

“The logjam right now is in the trade-up market,” Fuller said. “There’s a lot of pent-up demand. They’re ready and able once they get the go-ahead signal; this may be that kind of signal.”

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said the risk is the tax credit will act as an incentive for people who don’t need one, because the Senate measure favors higher-income earners.

“It’s close to the craziest thing I could think of,” Baker said. “The vast majority of users will just be people shuffling houses.”

‘Game the System’

In some cases, he said, people will try to “game the system” and engage in sham sales with trusted relatives or business partners to claim the credit, although tax lawyers said anti-abuse rules in the tax code may limit such fraud.

The breaks for car purchases, championed by Maryland Democratic Senator Barbara Mikulski, are limited to families that earn less than $250,000 that spend less than $49,500 on a new car. A 6 percent sales tax on a $25,000 minivan would be $1,500; deducting that would save a family between $150 and $495 in federal taxes, depending on their income-tax bracket. Tax savings from interest deductions also would vary depending on tax brackets.

“The deduction for the automobile purchases is going to be more valuable for middle-income and higher-income people,” said Robert Carroll, vice president for economic policy at the Tax Foundation, a Washington research group.

Carroll questioned the wisdom of both breaks, saying they would artificially prop up failing industries while encouraging overleveraged taxpayers to borrow more.

“Propping up a failing industry is certainly outside the scope of stimulus,” he said. “Households who are overleveraged and businesses that are overleveraged are much more susceptible to financial distress. You’d think Congress would know better.”

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