Senate’s Housing Tax Credit Favors Higher-Income Homebuyers

One potato, two potato, three potato, five?

I wrote previously Senate Advances Tax Break for Homebuyers

Look who sponsored the bill. Senator Johnny Isakson, Republican of Georgia, a former real estate broker. I wonder where Johnny gets most of his campaign dough? Senator Johnny says this amendment was modeled after the $2,000 home buyer incentive that helped lead the country out of recession in 1975. Minor differences? In 1975 that was a one year deal and only for new houses.

Upon further review it is apparant that this new version of the Senate's tax credit for home purchase favors the wealthy.

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.

Here is the caveat, if you don't pay enough tax then you can't write off the full amount.

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Senate’s Tax Credit Favors Higher-Income Homebuyers

By Ryan J. Donmoyer

Feb. 7 (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.”

To contact the reporters on this story: Ryan Donmoyer in Washington at rdonmoyer@bloomberg.net

Senate Advances Tax Break for Homebuyers

One potato, two potato, three potato, four.

The Senate voted to expand the economic stimulus package with a tax credit for homebuyers of up to $15,000. Change right?

Look who sponsored the bill. Senator Johnny Isakson, Republican of Georgia, a former real estate broker. I wonder where Johnny gets most of his campaign dough? Senator Johnny says this amendment was modeled after the $2,000 home buyer incentive that helped lead the country out of recession in 1975. Minor differences? In 1975 that was a one year deal and only for new houses.

The problem with the housing amendment? When you buy a new house you stimulate the economy. When you buy an existing house you do not. My house has been sitting here since 1981. You buy it and it does nothing to stimulate the economy. It does take away $15,000 in tax revenue though. Who knows? Maybe I buy a new house, or maybe I buy an existing house. Or maybe I am really smart. So happy I actually sold my house, I rent. Put the gain on the sale in the three month Treasury bill. Nice and safe.

Now here is a novel idea. How about you buy my house and I buy your house and we each get a tax credit? Or better yet, I buy a sack of potatoes from you for 1000 bucks and sell it back to you for 1000 bucks then you sell it to your neighbor for 1000 bucks and he sells it back to you for 1000. The economy was stimulated by 4000 bucks right? Maybe not. Numbers looks great though, don't they?

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Senate Advances Tax Break for Homebuyers

By DAVID M. HERSZENHORN
WASHINGTON — The Senate on Wednesday voted to expand the economic stimulus package with a tax credit for homebuyers of up to $15,000, a provision championed by Republicans as addressing a root cause of the recession.

The vote to add the tax credit, at a cost of about $18.5 billion, came as Senate leaders seemed to be nearing completion of negotiations. The majority leader, Senator Harry Reid of Nevada, suggested that a final vote on the stimulus plan could come on Thursday.

Moderate lawmakers in both parties are pushing to reduce the overall cost of the measure and to focus it more tightly on provisions that will quickly spur spending and create jobs. The vote came as President Obama met with centrist lawmakers to address concerns about the package.

Mr. Obama, while expressing willingness to compromise, also issued a warning to some Republican critics who have said they will press for major changes to the bill, including the removal of many spending programs in favor of wider tax cuts.

“I’ve heard criticisms of this plan that echo the very same failed theories that helped lead us into this crisis, the notion that tax cuts alone will solve all our problems, that we can ignore the fundamental challenges like energy independence and the high cost of health care and still expect our economy and our country to thrive,” he said.

“I reject that theory,” Mr. Obama continued, “and so did the American people when they went to the polls in November and voted resoundingly for change. So I urge members of Congress to act without delay.”

And, as if taking a cue from their president, Senate Democrats on Wednesday evening used their newly strengthened majority to swiftly reject a series of Republican amendments intended to cut spending or broaden the tax package in the stimulus bill.

Presuming Senate Democrats muscle the bill through, the final legislation must be reconciled with the $820 billion measure approved last week by the House.

The tax break for homebuyers, which the Senate approved by voice vote without opposition, was the second amendment in two days intended to encourage consumers to make major purchases. On Tuesday, the Senate approved a tax incentive for car buyers, sponsored by Senator Barbara A. Mikulski, Democrat of Maryland, that would allow the deduction of sales tax and loan interest on purchases made this year.

But while both of those incentives were applauded by lawmakers who said that the bill should quickly induce consumer spending, some economists said they were short-sighted and lacked the forward-thinking approach Mr. Obama has demanded.

Adam Posen, deputy director of the Peterson Institute of International Economics, said that homebuyers would have trouble accessing loans because of the continued tightness in the credit markets and that the car buyer incentive fell short by not focusing on fuel-efficient vehicles, and that the money might be better directed at mass transit.

“They are also structurally unsound,” Mr. Posen said of the two provisions, “reinforcing the attempts of industries that are too large — housing construction, automobile production — to survive based on government distortions.”

He called them both “terrible, pandering ideas.”

But Senator Johnny Isakson, Republican of Georgia, a former real estate broker, who was the prime sponsor of the homebuyer credit, said it was modeled after a similar, $2,000 homebuyer incentive that helped lead the country out of recession in 1975.

“We do have a history in this country with housing and it goes back to the crash of 1974, which actually in terms of inventory and price declines was comparable to what’s happening now,” Mr. Isakson said at a news conference.

“Within one year of the inception of that tax credit, two-thirds of the available inventory that was on the market was gone. The market moved back to a balanced inventory, values stabilized and things became very healthy. The only reason I know all of that is I was selling houses in 1974, that’s what I was doing to feed my family and make a living.”

The tax credit would give buyers 10 percent of the price of a primary residence bought within one year, up to $15,000, and is intended to stabilize plummeting home prices, which caused a wave of foreclosures and led to the near collapse of the financial system as Wall Street firms wrote down billions in mortgage-backed assets.

With Wednesday’s additions, the cost of the Senate package has climbed well above $900 billion — the limit that Mr. Obama has set for the final legislation. Intense negotiations seemed likely over how to reduce the price tag.

At the White House on Wednesday, Senator Olympia J. Snowe, Republican of Maine, personally delivered a list of cuts, totaling about $100 billion, that she said should be made.

Ms. Snowe met one-on-one with Mr. Obama in the Oval Office, and the president met later in the day with Senator Susan Collins, Republican of Maine, and Senator Ben Nelson, Democrat of Nebraska. Ms. Collins and Mr. Nelson have been working on a substitute bill that would strip out spending that they said would not provide an immediate jolt to the economy.

Ms. Snowe, leaving the White House, said it was imperative that “every provision has a job creation component.”

Initiatives that critics hope to remove from the bill include $50 million for the National Endowment for the Arts, $14 million for cyber security research by the Homeland Security Department, $1 billion for the National Science Foundation, $400 million for research and prevention of sexually transmitted diseases, $850 million for Amtrak and $400 million for climate change research.

Jeff Zeleny contributed reporting.