The Congressional Budget Office has estimated that the effective tax rate on owner-occupied housing is -5.1% (yes, negative), while other investments have an effective 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. rate of 13.8%. This tax-induced incentive to invest in owner-occupied housing is probably a big reason why so much capital went into that sector and sparked the housing boom.
Now that these tax policies have failed and the boom has busted, the homebuilders are asking for us to double down:
The builders' lobby is ramping up its sales pitch for a $250 billion stimulus package called "Fix Housing First," arguing that financial markets won't recover until home prices stop falling. They are calling for a generous 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. for home purchases and a federal subsidy that would lower a homeowner's mortgage rate.
Congress resisted a similar effort to pass a larger tax credit earlier this year, instead creating a $7,500 credit for new-home purchases that had to be paid back over 15 years, effectively extending an interest-free loan.
Builders are promoting the campaign with full-page newspaper advertisements, but face an uphill battle, with critics suggesting the proposal is too expensive and that it too heavily promotes home purchases rather than addressing loan modifications for delinquent homeowners.
In 2009, the U.S. government will forego collecting some $100 billion in tax revenue due to the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. alone. If this generous and expensive deduction were treated like the expenditure it really is, and forced to compete against other federal spending priorities, we might have a more sensible economic picture.
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