Friday, January 8, 2010

Homebuyer tax credits: two views

Looking back over 2009, the first-time homebuyer tax credit is still generating controversy in political and tax circles. TaxVox, the tax blog of the Urban Institute and Brookings Institution, called the first-time homebuyer tax credit the third worst tax idea of 2009. The Tax Policy Foundation, using the credit as an example, called the “influence of the housing lobby on the federal tax code,” one of the top ten tax stories of the decade.

Today I want to share excerpts from both sides of the argument. First, the skeptic’s view from TaxVox:

The early returns are coming in on the First-Time Homebuyer Tax Credit. And it appears to be a bigger boondoggle than even I thought it would be.

At a House Ways & Means Oversight subcommittee hearing today, the Internal Revenue Service inspector general reported that the IRS is auditing more than 100,000 of the roughly 1.4 million returns that included a claim for the credit. This is a staggering audit rate for an agency that usually reviews only about 1 percent of returns.

And what the agency has found is jaw-dropping. Almost 74,000 buyers claimed the credit even though they probably owned a house over the past three years (the credit is only available to those who did not own during that period). One dead give-away: More than 12,000 of this bunch claimed the residential energy credit sometime during the past three years. Another 19,000 filed for the homebuyer credit even though they had not actually gotten around to buying a house, a fairly spectacular exhibition of chutzpah. And 580 credits were claimed on behalf of children, including at least one four-year-old—obviously a budding real estate developer.

Some taxpayers were more confused than crooked. Almost 50,000, who didn’t realize the credit increased from $7,500 to $8,000 in 2009, may have claimed less they deserved. But there was plenty of fraud too. The agency is investigating 167 separate criminal schemes associated with the credit.

And there is more. In a separate study, the Government Accountability Office concluded that in 2008-2009 more than 25,000 credits were claimed by people who reported no income and another 165,000 by those earning $25,000 or less. Care to wager how long it will be before those houses end up in foreclosure? If they were ever actually purchased, that is.

Meanwhile, supporters of the homebuyer tax credit have argued that the homebuyer tax credit has buoyed the housing market during difficult times. Georgia’s own Sen. Johnny Isakson has been a forceful advocate for the credit, and he made the following remarks on the Senate floor in November during debates on extending the credit:

We learned about 8 months ago that a tax credit for first-time home buyers worked. It worked to bring back the entry level marketplace in housing, and it helped to begin to stabilize the housing market which led us in late 2007 into the difficulties we have experienced over the last 20 months. Extending it is important, as long as everybody still understands permanent extension would be bad. Extending it to next April, which this bill does, with a closing no later than June 30, allows the American housing market and first-time home buyers to exercise their right to take tax they pay, convert it to equity in the investment and net appreciating asset, and help stimulate what is the rock-solid base of the American economy.

We also add, in addition to the $8,000 credit extension for first-time home buyers, a move-up buyer tax credit of $6,500. This is the cornerstone of the substitute before us now. It offers to any previous homeowner who has lived in their home for at least the last 5 years the opportunity to sell that home, invest in a new home, and take up to a $6,500 tax credit…

In response to the Internal Revenue Service concerns we expressed a few months ago on fraud, we put in every single request they made for fraud to see to it the HUD-1 is attached to tax statements, to see to it there is no fraudulent claim of the money, and to see to it the IRS has every tool they can to prosecute to the fullest anybody who would abuse this credit…

I urge all Americans who have always dreamed, if they are a first-time home buyer, of having a home of their own or Americans who have been gridlocked in the failure of our move-up market to actually move up and work, you have a 7-month opportunity that is good for you, it is good for the United States of America, and it is good for this economy.

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