A Crazy Idea Appears in the New York Times

June 3, 2015

Alan Cole

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 tax proposal in the article caught my eye: “For longtime owner-occupants in such neighborhoods, we should consider a fully refundable tax credit 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 credit is distinct from a tax deduction, 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 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.

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A 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.

A 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.

A 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/local taxes paid, mortgage interest, and charitable contributions.

A 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.