Tax Carnival #68: A Herd of Tax Advice
Utah tax tidbit: organ donation credit

The federal homebuyer credit's
'exit strategy problem'

We are now a month away from the deadline for property buyers to have signed contract in hand so they can claim the latest version of the federal homebuyer tax credit.

Any guesses as to when we'll start hearing about the need to continue it yet again? How about yesterday.

This tax credit, which is propping up the housing industry, has what one economist so nicely dubbed an exit strategy problem.

"If you have a short-run program to stimulate demand, it's always tricky to figure out how you gently remove it without going off a precipice," James M. Poterba, an economist at the Massachusetts Institute of Technology, told the New York Times.

Even people who thought, and still think, the credit was a bad idea now say today's housing market needs the credit to continue.

"You don't make drug addicts go cold turkey," said Robert Shiller, a professor of economics at Yale and co-developer of the Standard & Poor's/Case-Shiller housing price index. "The credit interferes with the market in an arbitrary way, but ending it now would be psychologically powerful. People will be in a bad mood about buying a house."

What about people who are in a bad mood because of this continuing credit chaos?

Phase it out: At least Shiller, an early opponent of the credit, is for gradually phasing it out.

But when might that complete phaseout actually occur? To paraphrase one of my all-time favorite New Yorker cartoons, how's never? Is never good for you?

I have no faith in Congress' ability to let this credit die. Senators and Representatives over the years have shown no backbone when it comes to standing up to the housing and real estate industries.

Outside the realm of real estate, notes the Times, many government programs created to deal with the financial crisis have ended and credit markets have largely returned to normal. But housing remains the most coddled and the most troubled sector of the economy.

So I fully expect Congress to cave yet again when added extension pressure begins as April 30 gets closer.

Bad idea, D.C.

Many, including me, believe the credit is simply obscuring the actual weakness of the market. We have to let the system play out, as painful as that might be for buyers, sellers and mortgage bankers alike, and then go from there.

The boom is over, folks. Let it go. Start dealing with today's housing realities and quit cluttering up the tax code with "fixes" that simply delay the inevitable.

States still a problem: I can't rag on Capitol Hill without tossing a few blog brickbats at state lawmakers, too.

Housing market concerns are trumping fiscal considerations in several states. New Jersey legislators have introduced a bill that would give buyers a $15,000 credit spread over three years. South Carolina recently announced a $7,000 down payment assistance program for public employees.

And then there's California. It's facing a $20 billion budget deficit that has led to some school closings and furloughed state workers. No matter.

Last week Gov. Arnold Schwarzenegger signed into law a measure that allocates $200 million for more, and more expansive, homebuyer tax credits.

This is the Golden State's second round of such credits. The first one, which was limited to just first-time buyers, provided half the funds as this latest credit. As soon as that money was gone, the state's housing and real estate industries began lobbying for its return.

So see, state lawmakers are as susceptible to special interests, particularly in the housing sector, as are federal legislators.

And as I note in my other blog, Eye on the IRS, I am as skeptical about the value of state credits as I am about the federal one.

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