Why the Senate Did the Right Thing
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Did you hear that fraud was so prevalent that a four-year-old took the $8,000 tax credit for first-time home buyers? Did you see the report that most people who took the credit would have bought a home anyway? Did you read the one about how Congress dramatically underestimated the program's cost?
Debate over the fate of the credit has been raging at our dinner table for weeks, with yours truly pretty much the only supporter. Every night someone brings home another argument against extending it.
Even as newspaper editorial writers lined up against it, National Public Radio questioned whether people really bought homes because of it and academics ridiculed its inefficiency, the Senate overwhelmingly decided late last night that it was worth extending and broadening the tax credit for buying homes.
Under the Senate-passed bill, likely to be adopted by the House, first-time buyers could take the $8,000 credit on homes bought through April 2010 and closed by June 30, 2010. Move-up buyers who have lived in their home for at least five years would be eligible for a $6,500 credit during the same time frame.
It's strange how academics seemed to turn on the credit. When it was initially discussed, real estate professors trotted out stories about how a 1975 housing tax credit helped lift the industry out of recession. Now the focus seems to be on the "true" cost of the subsidy.
Critics point to the National Association of Realtors assertion that, out of the 1.4 million households that took the credit between February and September, only 350,000 to 400,000 would have bought a home without it. Then they do some elementary school math. If the program cost the Treasury $15 billion, then the true cost of subsidizing each home sale that wouldn't have been made is $43,000. That's a pretty ineffective subsidy, they conclude, considering the typical cost of a starter home is in the $100,000s.
Well, did everyone who participated in the cash for clunkers boondoggle really need a new car? No. Why should we hold the tax credit program to a different standard? The idea was to stimulate the housing market and try to stop the free-fall in home prices. The program seemed to help in that respect.
If the idea was to put a floor under falling prices, why didn't Congress just extend the tax credit to the regions hit hardest by foreclosures? Why? Because it would be politically inexpedient. You'd never get the program through Congress. Also, there are several other multi-billion-dollar government programs to combat foreclosures.
It's pretty hard to overcome arguments over fraud in the program, besides reminding people that there's fraud in nearly every government tax credit program. According to Treasury inspector general for tax administration, the IRS didn't require people to submit paperwork to substantiate the purchase of a home. That's got to change. The Senate measure gives the IRS more power to prevent fraudulent claims.
Judging from my conversations with new-home salespeople, I don't think there's any question that the tax credit was a major factor, if not the prime determinant, behind improved conditions in the market this summer. It got people into model home centers. The deadline created a sense of urgency to buy. When it was too late to take the credit, sales slowed.
There really was a risk that the market might significantly weaken during the winter without an extension. Setting an April deadline was the right thing to do. By then, seasonal forces should take over and help propel sales. The industry then should be strong enough to stand on its own.