Tax Credit Limbo

Homeownership credit and other housing issues take a backseat as focus turns to Iraq.

By Steve Zurier

By Steve Zurier. There are dozens of well-meaning lawmakers and lobbyists in Washington who would love to see the government pass a tax credit that would create a market for affordable single-family homes.

But until the United States resolves the war in Iraq, don't expect any significant new housing legislation.

One important piece of housing business on the government's plate is the homeownership tax credit, which would give builders a tax credit of up to 50 percent of the cost of new construction or rehabilitation.

The program seeks to stimulate the production of affordable homes in distressed communities for low- and moderate-income households earning roughly less than 80 percent of a metro area's median income. In Baltimore, where the median income for a family of four stands at $67,300, a family earning less than $53,850 would be eligible for one of the new or rehabilitated homes.

The Bush administration's fiscal 2004 budget proposes the government spend $2.4 billion over five years on the homeownership tax credit. The NAHB estimates that over five years the tax credit could produce as many as 250,000 new and rehabilitated homes, create more than 600,000 jobs, and generate $20 billion in wages and $10 billion in tax receipts and fees.

Congressional support

The homeownership tax credit also has its supporters in Congress. On the House side, Congressmen Rob Portman (R-Ohio) and Ben Cardin (D-Md.) have introduced legislation, and Sen. Gordon Smith (R-Ore.) introduced a Senate-side bill. Both bills are similar to the Bush administration's budget proposal.

Bills were introduced in Congress because a new tax measure like the homeownership tax credit cannot be passed through as a budget appropriation. That's only for existing programs. Any new tax credit must have the full weight of legislation that passes both houses of Congress and is signed into law by the president. Whether that will happen this year is unclear, but the tax credit does have broad support across both parties.

"The homeownership tax credit is an excellent idea that's gradually gaining momentum," says Kent Colton, a senior scholar at Harvard's Joint Center for Housing Studies. "While it's a good sign that it's in the president's budget and has support in Congress ... in the next few months the focus will be on Iraq."

Steve Bartholomew, president of Main Street Homes in Austin, Texas, says the homeownership tax credit would be a great boost to his business. Bartholomew says Main Street builds in excess of 700 homes a year, and roughly 95 percent of his buyers would qualify under the plan as proposed by the Bush administration and Congress.

"It sounds too good to be true," Bartholomew says, who adds that out of the 12 subdivisions his company has under construction right now, roughly 40 percent of the homes sell for under $100,000. "If we could get involved in a tax credit like that it would be a home run. The tax credit would reduce our costs, and our sales would go through the roof. The only thing I'm concerned about is when programs like that get to the local level they get cumbersome."

Jerry Howard, the NAHB's executive vice president and CEO, says the builder trade group would prefer to see the homeownership tax credit included as part of the administration's $694 billion stimulus package. The Bush stimulus package promises to create 510,000 new jobs by year's end and another 891,000 jobs by the end of 2004.

"Our feeling is that the only tax legislation Congress will tackle this year is the economic stimulus package," Howard says. "We are disappointed that the homeownership tax credit was not put into the economic stimulus package ... but we understand that the Bush administration did not want any sector-specific incentives in the stimulus plan."

Stimulus plan debated

The Bush stimulus plan also drew criticism in March from the National Council of State Housing Agencies (NCSHA), which says the administration's plan to end so-called "double taxation" of dividends could soften the market for low-income housing tax credits. The NCSHA study, prepared by Ernst amp; Young, estimates that 40,000 fewer affordable rental units would be created each year--a 35 percent drop in production if the full dividend plan is enacted.

The NAHB's Howard reacted cautiously to the Ernst amp; Young study, pointing out that the Mortgage Bankers Association (MBA) released a report which says the Bush stimulus plan may have a limited effect on the low-income housing tax credit. MBA economists say the stimulus plan would spur economic growth overall, creating roughly 1 million jobs by the end of 2004.

"Reports from two respected organizations that reach vastly different conclusions on the White House dividend proposal and its impact on the low-income housing credit just go to show what we've been saying all along--that we should not, and can't rush to judgment," Howard says.