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.    

 

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.    more »

The AIG bonuses are an outrage. But the bigger scandal is that a grandstanding Congress wants to use the tax law to punish the companies that paid them and the employees that got them. If Congress wants to limit bonuses for employees of bailed-out companies, it should just do it. But using the Internal Revenue Code is a truly terrible idea. And dipping into the Code to win political points is worse. Long ago, people were rightly outraged when Richard Nixon tried to turn the IRS into a weapon to punish his enemies. This gotcha tax is another variation on the theme, and nearly as inexcusable. Imagine, for instance, if a GOP Congress retroactively barred people from deducting charitable gifts to Planned Parenthood. Or Democrats imposed a 50 percent surtax on companies that that do security work in Iraq.    more »

Did bad tax policy help cause the economic meltdown? Former assistant Treasury Secretary for Tax Policy Pam Olson thinks so. Speaking at a Dec. 5 tax reform conference sponsored by TPC and Tax Analysts, Pam fingered what she called an “anti-equity and pro-leverage” Internal Revenue Code as one culprit in the collapsing credit markets. TPC’s Bill Gale agrees--after a fashion--although other tax experts are unconvinced.    more »

The most interesting thing I heard in last night's debate between John McCain and Barack Obama (in fact, the only interesting thing I heard) was McCain's call for a new federal effort to directly refinance residential mortgages into new low-interest loans. The plan got me thinking about a provocative way to pay for it—eliminate the mortgage interest deduction for these new loans.   more »

My sources at the Federal Reserve and in the financial markets increasingly expect that Washington is going to have to put up hundreds of billions of dollars more to directly recapitalize troubled banks. Such a step would be in addition to the $700 billion authorized by Congress last week and could require new congressional appropriations. It would put even greater pressure on the short-term budget deficit and add to uncertainty over the total cost of cleaning up the financial system mess. It could also require new federal legislation, setting up yet another bruising battle on Capitol Hill.    more »

Let it be written: If the Senate-passed financial services bailout bill turns out to save us from the next Great Depression, we will owe a deep debt of gratitude to… chicken poop. If not, we can simply say the entire proposition turned out to be little more than, well, you know.    more »

Whatever its ultimate fate, the $700 billion financial market bailout has me thinking about how events of the past few months have fundamentally changed the nature of economic risk in the U.S. And, that, in turn, raises some interesting questions about capital gains taxes.    more »

We had fun ridiculing the idea of suspending the gasoline tax for the summer, but the gas tax holiday was minor mischief compared with the newest idea for dealing with the financial market meltdown: a two year holiday on capital gains taxes.    more »

Barack Obama and John McCain are slowly beginning to get it: For the next President, this week’s financial market meltdown has changed everything. Suddenly, their grandiose promises of new tax cuts and ambitious spending are sounding more hollow than ever. An $11.3 trillion national debt will do that to you every time.    more »

The Bush Administration has asked Congress to write the biggest blank check in the history of the planet. And Congress may very well do it. The Administration’s proposal requires only semi-annual reports to congressional committees and explicitly exempts any bailout-related actions from judicial review. This has a whiff of the war on terror about it. “We are in a crisis,” the Administration cries, “and you must act now. Do not stop and think. Do not amend. Just approve what we say or we will blame you for what happens next.”    more »

Crumbling financial markets mean more awful news for governments already reeling from an economic slowdown and mortgage foreclosures. The only glimmer of optimism is that the sluggish revenues and rising spending that are around the corner should only be transitory. Assuming the markets and the economy rebound, these fiscal shocks will be a fading memory after a few years.

That won’t relieve short-term budget pressures. Nor will it make life any easier for a newly-elected President who will take office in the face of a deficit that CBO projected at nearly half a trillion dollars even before the markets cratered this week. But there is a big difference between the kind of one-time budget shocks caused by crashing financial markets and the trillions in long-term unfunded obligations that Washington is happily ignoring. That slow wasting of the nation’s financial underpinnings doesn’t grab headlines, but is far more dangerous.

If the current market correction ends up looking more or less like our last three big financial hiccups in 1987, 1990, and 2001-2003, capital gains tax collections will plunge for a year or two, but then bounce back.

After the market’s crash in 1987, these revenues fell 19 percent in 1988, flat-lined for a year, and then, as the stock market sagged again, dropped another 27 percent by 1991. However, through the rest of the 1990’s, capital gains taxes grew strongly as the market boomed. By 2000, Washington was collecting more than $120 billion in capital gains taxes, nearly four times what it got a decade before.

The pattern held after the tech bubble burst in 2001. Taxes on gains plunged by 59 percent through 2003, but then, with the market, they recovered. By 2005, revenues had climbed 50 percent, even though the top rate on gains had been cut to 15 percent.

Some states did not fare so well. California saw taxes on capital gains and stock options plunge by nearly $10 billion after the dot.com bust. And while those revenues have rebounded, the state has never quite gotten back on its fiscal feet.

Of course, some things are different this time, even for Washington. Thanks to the government’s unprecedented bailouts of Fannie Mae, Freddie Mac, Bear Stearns, and now AIG, Washington is on the hook for tens of billions and perhaps hundreds of billions more in spending that nobody foresaw even a couple of months ago.

It is not possible to put a dollar amount on those new obligations, which is very frightening. If the government ends up nationalizing more failing firms, the fiscal cost could become far more worrisome. But like spending for natural disasters, these bailouts are likely to be one-off expenditures. The government, thankfully, can buy AIG’s toxic assets only once.

Don’t get me wrong. This is all a very, very bad business. But unlike the future prospects for, say Medicare, this grim news has the potential to improve fairly soon.

Just when we thought the bailouts were over, just when Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson insisted failing financial institutions would, like Lehman Brothers, sink or swim on their own, along comes AIG. Make no mistake, the Wall Street financiers called Bernanke and Paulson’s bluff. After the two men said Washington would not throw taxpayer money into the AIG pot, the big money guys went all in, insisting they would not rescue the rapidly-sinking financial services giant without cash from Washington.    more »

Unlike other credits, the new one is really a 15 year interest-free loan. Qualifying buyers will get a refundable credit of the smaller of 10 percent of their purchase price or $7,500 for homes bought between April 2008 and June 30, 2009. Because they don’t get the credit until they file a tax return—and not when they buy the house—it’s unclear how much the cash windfall will help with down payments—which presumably was the whole idea. And interest-free doesn’t mean free: they must pay the money back to the government over 15 years.    more »

The Washington pols who are pushing housing legislation should meet my friends Steve and Laura. They are a 30-something couple with a two-year old daughter, and they have been waiting for years to buy a house.   more »