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A Crazy Idea Appears in the New York Times

1 min readBy: Alan Cole

In the New York Times op-ed page today, I noticed an article on residential areas that have suffered since the housing crisis. I don’t have much to say on housing; I’m sure the author knows much more about distressed residential areas than I do. However, the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. proposal in the article caught my eye: “For longtime owner-occupants in such neighborhoods, we should consider a fully refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). for the total cost of home repairs.”

This is, simply put, a disastrous idea. To be clear, the general idea that owner-occupants should get some help in repairing their homes to improve overall neighborhood quality is a reasonable one. The specific implementation of that general sentiment is the problem.

A tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. is distinct from a tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. , in that a credit is worth its face value; a $100 credit means you pay $100 less in taxes. (In contrast, a deduction just means you subtract $100 from your taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. .) Furthermore, a refundable tax credit is a provision that allows one’s tax liability to go below zero.

So if the government is offering a fully refundable tax credit for the total cost of home repairs, it is paying 100% of the bill for the repairs – or rather, it is reimbursing the taxpayer in the full amount of whatever the taxpayer says she paid for home repairs.

If someone spent $50,000 on a home renovation and billed the IRS for the full $50,000, I imagine that would raise a few eyebrows. And refundable credits can be notoriously difficult to verify. These issues are avoidable. The policy proposal needs some revision.

In any event, this is much more of a spending program than a tax program, and it should be enacted on the spending side of the ledger.