Big Government and Housing
We’ve been hearing an awful lot lately about big government taking over the health insurance business. But there may be no commercial transaction in the country more heavily subsidized than housing. And now, many of the very people who are in a panic over government interference in medical care want to increase Washington’s role in home ownership.
At issue: a plan being pushed by the real estate industry to raise and extend the $8,000 homebuyer tax credit that was part of this year’s stimulus bill. That measure is due to expire in November and, predictably, homebuilders and real estate firms would have Congress double down on the subsidy. They’d raise the credit to $15,000, and make it available to any homebuyer through 2010. But make no mistake, come the end of next year, this goodie will end up on the ever-growing wishlist of tax extenders—allegedly temporary tax breaks that become as much a part of the Washington landscape as the Lincoln Memorial.
Before we talk about the new credit, let’s look at where we stand. Today, home owners enjoy about $200 billion a year in tax breaks: Among other benefits, they can deduct mortgage interest and state and local property taxes, and they get to exclude up to $500,000 in capital gains from the sale of their home. Plus, first time buyers get the stimulus credit.
But that is just the beginning. Taxpayers are also heavily subsidizing mortgage rates. Fannie Mae and Freddie Mac (now effectively owned by the government) along with the Department of Housing and Urban Development are guaranteeing as much as 85 percent of all new mortgages, and the Federal Reserve is buying 80 percent of the mortgage-backed securities into which these loans are packaged. As Peter Eavis of The Wall Street Journal wrote last week, “housing remains on government life support.”
While keeping the battered housing market from completely falling off a cliff is a good idea, the medium and long-term benefits of all this money flying around are not entirely clear.
Take the mortgage interest deduction, the most generous of the tax benefits. It is both costly and upside down, in that the biggest benefits go to the highest-income homeowners. A recent paper by TPC’s Eric Toder, Ben Harris, and Katherine Lim estimates the deduction will cost Treasury nearly $100 billion in lost revenue by 2012. The top 20 percent of taxpayers (those making more than $98,000) will get 80 percent of the benefit, and the highest-earning 10 percent will get more than half.
There is little evidence that this tax break increases home ownership. And at least some of the subsidy is shared by sellers in the form of higher prices–not a great long-term use of taxpayer dollars.
A refundable credit could at least fix the distribution problem. You could, indeed, replace the mortgage deduction with a fairly generous credit. President Bush’ tax reform panel proposed one version equal to 15 percent of interest payments.
So maybe the homebuyer credit people are on to something after all. Do you think they’d be willing to tinker with the design a bit and swap it for the mortgage interest deduction?