The early returns are coming in on the First-Time Homebuyer Tax Credit. And it appears to be a bigger boondoggle than even I thought it would be.

 

At a House Ways & Means Oversight subcommittee hearing today, the Internal Revenue Service inspector general reported that the IRS is auditing more than 100,000 of the roughly 1.4 million returns that included a claim for the credit. This is a staggering audit rate for an agency that usually reviews only about 1 percent of returns.

 

And what the agency has found is jaw-dropping. Almost 74,000 buyers claimed the credit even though they probably owned a house over the past three years (the credit is only available to those who did not own during that period). One dead give-away: More than 12,000 of this bunch claimed the residential energy credit sometime during the past three years. Another 19,000 filed for the homebuyer credit even though they had not actually gotten around to buying a house, a fairly spectacular exhibition of chutzpah. And 580 credits were claimed on behalf of children, including at least one four-year-old—obviously a budding real estate developer.

 

Some taxpayers were more confused than crooked. Almost 50,000, who didn’t realize the credit increased from $7,500 to $8,000 in 2009, may have claimed less they deserved. But there was plenty of fraud too. The agency is investigating 167 separate criminal schemes associated with the credit.

 

And there is more. In a separate study, the Government Accountability Office concluded that in 2008-2009 more than 25,000 credits were claimed by people who reported no income and another 165,000 by those earning $25,000 or less. Care to wager how long it will be before those houses end up in foreclosure? If they were ever actually purchased, that is.

 

There is a lot more we need to learn about this mess. But it is easy to imagine the recipe. Take a commssion-starved real estate agent, add a buyer looking for a deal, and throw in a huge cash payment from the government. Is it any surprise that 10 percent of those claiming the credit either bungled the transaction or were engaged in a flat-out scam. 

 

Add to all of this the estimate by Ted Gayer at Brookings that more than 85 percent of the projected 2 million people expected to claim the credit would have bought a house anyway. Like the late, unlamented cash for clunkers program, the homebuyer subsidy is very likely doing little more than further running up the national debt to accelerate  some home purchases.

 

Congress is now debating whether to either continue the credit into next year or even expand it to include all home purchases. This program, as they used to say up in the North End of Boston, needs to take two in the hat.    

 

Last week the Congressional Budget Office quietly released its October Monthly Budget Review showing preliminary 2009 budget numbers. The $1.4 trillion deficit more than tripled the previous record of $459 billion set just last year (see top table). More than half of the increase was due to a $530 billion jump in outlays but 44 percent came from a 17 percent drop in revenues. That decline resulted in the federal government collecting a smaller share of taxes than at any time in the last half century.

A bit of the $420 billion decline came from tax cuts in the stimulus bill but six out of seven lost dollars were due to the recession. CBO estimated that the 2009 stimulus reduced revenues by $61 billion in 2009, almost the same as the $62 billion revenue loss from the 2008 tax rebates.

THE stimulus bill mostly cut individual income taxes. The Making Work Pay credit reduced wage withholding starting in April. The new homebuyer’s credit gave up to $8,000 to people claiming it on their 2008 returns. Most of the other cuts modified existing tax credits—the earned income tax credit, the child credit, and the education credit—and the bulk of their impact won’t come until beneficiaries file their 2009 tax returns next April. All told, the stimulus cuts accounted for only a little more than a quarter of the 20-percent drop in income tax revenue—$230 billion  (see bottom table).

Corporate income tax revenues took the biggest hit, down by more than half from 2008. The deep recession wreaked havoc on corporate profits, leaving a large majority of firms with no tax liability. The consequent $165 billion drop in corporate taxes accounted for nearly 40 percent of the total revenue decline.

Social insurance and other federal taxes suffered smaller hits—only about 2 percent, less than $25 billion in total.

Total federal revenue in 2009 amounted to just 14.9 percent of GDP, the smallest fraction since 1950 and far below the 26 percent of GDP spent by the federal government. That gap will narrow in coming years but CBO projects that it will average more than 4 percent of GDP over the next decade, and that’s only if the 2001-2006 tax cuts expire in 2011 as scheduled. Extending those cuts, even only for President Obama’s broad middle class, will mean deficits as far as the eye can see.

Just abut every conversation I’ve had with a Democratic elected official or staffer in the past few weeks came around to the same urgent question. And, no, it was not about health reform. It was about jobs. When, they ask with more than a hint of panic in their voices, will the jobs come back?   more »

Alan Auerbach and Bill Gale wrote an interesting new paper that tries to answer an important and timely question: Does fiscal stimulus actually work? Their conclusion: It doesn’t do a bad job at all. In a paper prepared for the Fed’s August 20-22 Jackson Hole conference, Alan and Bill conclude that while the evidence is still a bit dicey, there is a strong case to be made for well-timed tax cuts and spending increases.    more »

Congressional Democrats, having apparently lost patience with the first Obama stimulus, are beating the drum for yet another round of government money to pump up the still-lagging economy. They need to take a deep breath. Lori Montgomery wrote a nice piece in yesterday’s Washington Post explaining why. Using some data from Mark Zandi at Economy.com, Lori reports that barely $100 billion of last winter’s nearly $800 billion stimulus has made its way into the economy. Until the rest is spent, why would we want to run up the debt by hundreds of billions more?    more »

It’s been more than two months since President Obama signed the American Recovery and Reinvestment Act (ARRA) into law, so where’s the money? Most workers saw a small boost in take-home pay earlier this month, thanks to withholding changes their employers made to implement the Making Work Pay tax credit. Many retirees have received their $250 piece of the stimulus pie. Some people who bought homes this year undoubtedly claimed the $8,000 first-time homebuyers credit on their 2008 tax returns. But most of us will have to wait until we file our 2009 returns next spring to get the rest of the tax bennies.   more »

Tax Day has come and gone and IRS commissioner Doug Shulman says refunds this year will total roughly $300 billion. About two-thirds of that amount had already gone out to early tax filers by the beginning of this month. That’s a significant amount of money and it could boost the economy—if recipients spend it. In today’s economic environment, that’s a big if.   more »

co-authored with Mark Greenberg, Georgetown Center on Poverty, Inequality, and Public Policy During the Presidential campaign, Barack Obama talked about the Making Work Pay tax credit as being an offset to the payroll tax on the first $8,100 of earnings for each worker (6.2% * $8,100 = about $500). During the campaign, Tax Policy Center analyzed the credit in the context of individual earnings – even in the case of married couples. If only one partner worked, we assumed the maximum credit for the couple was $500 and if two partners worked, TPC assumed the maximum credit increased to $1,000. Not so, as it turns out.    more »

Many of the tax cuts in the stimulus bill President Obama signed today are built on the legislative fantasy that they will expire after a year or two. The reality is that Congress and Obama are likely to continue these tax breaks long after the economy recovers. And the price of doing so will be staggering: Making just four of the most popular individual tax cuts in the bill permanent would reduce federal revenues by more than $1.7 trillion from 2010 through 2019. They'd be more than three times more generous than the bill’s spending initiatives, which are expected to cost a mere $500 billion.    more »

The one tax issue that still seems unresolved in the stimulus debate involves a provision that would let businesses convert current losses into cash. The measure would allow a firm that is losing money in today's recession to redo up to five years worth of tax returns. That way it could use those losses to get a refund of some taxes it paid in past years. The ability to carry back these Net Operating Losses for up to five years could be an important boost to cash-strapped companies. Like many individuals, businesses desperately crave cash now. Many cannot borrow in the constipated credit markets, their sales are plummeting, and a little more operating cash may be the difference between having to lay off more workers or keeping them on the job. The NOL carryback is an easy way to get quick money to these businesses.    more »

House-Senate conferees have just about wrapped up a compromise $789 billion stimulus plan that should land on President Obama’s desk by the weekend. While we do not yet have bill language or revenue estimates, published reports suggest that about one-third of the compromise measure is made up of tax cuts. For the most part, the final version of those tax breaks is worse than the initial House proposal. Most troublesome, this measure waters down two important proposals that would have gotten money into the economy rather quickly and instead adds a $70 billion Alternative Minimum Tax patch that will do little to boost spending—the goal of any good stimulus.    more »

The press has widely reported that the difference between Senate and House stimulus bills is mostly about tax cuts (Senate) versus spending (House). That's wrong. The main difference is about who runs the spending programs-the IRS or program agencies In fact, the Senate bill includes some major expansions in spending--notably, subsidies for car and home buyers--and cuts in others, such as aid to state and local governments. The new Senate spending was presented as tax cuts, but that is simply window dressing. The add-ons are spending programs, and particularly ineffective ones at that.    more »

The Senate has made the stimulus worse. At a cost of $130 billion, the bill the Senate passed today added three tax provisions that would do little to boost consumer spending--the key to digging us out of our economic hole The stimulus losers: patching the Alternative Minimum Tax for another year ($70 billion), giving a new tax subsidy to homebuyers ($39 billion), and providing new car buyers with a new tax break ($11 billion).    more »

The compromise stimulus bill likely to win Senate approval attracted a handful of Republican votes by adding tax cuts and trimming spending. Most of the spending cuts came in programs intended to aid states directly, including education assistance. However, with 46 states now in the red, and states expected to run cumulative deficits of more than $350 billion through 2011, that choice seems odd. Keeping state and local governments from raising taxes or laying off workers to meet their balanced budget requirements should be a top priority of any stimulus. Keeping income and sales taxes from rising in the heart of the recession would, at the very least, keep things from getting worse. When the New York Times surveyed economists in December, about two-thirds of economists across the political spectrum endorsed the idea of increasing federal spending to maintain current state budgets or expand education.    more »

We graded many of the provisions in the Congressional stimulus bills, but resisted producing a bottom line. New York Times columnist, David Brooks, however, used our grades to calculate an overall grade point average (GPA) in today’s paper. Brooks calculated, based on our grades, that the Senate plan scores a 2.26 and adds that it's "not exactly the kind of report card you’re proud to take home to momma." Using the Brooks methodology the House plan would earn a 2.4. You wouldn't brag about that either.   more »