Homebuyer Tax Credit Won’t Solve Housing Crisis

Imagine your boss suddenly announced that the company would be giving $5 to the next 20 employees who took their lunch break, and that the money would be coming out of everyone else’s paycheck. It would certainly benefit the few who were first into the cafeteria, and it might encourage some workers to take a break that otherwise would not. However, everyone who already ate or might be stuck on a conference call would see this as an arbitrary and pointless policy. Unless they were a Trenton lobbyist - then they would call it stimulus.

Governor Christie recently vetoed a bill that would have given New Jerseyans of all incomes up to $15,000 if they purchased a home during a tax credit program, which would have existed until $100 million was spent over three years. Legislators are now considering a vote to override the governor’s veto. The policy may be well intentioned, but it would do little to help put New Jerseyans back to work.

Despite being wrapped in the moniker of a tax credit, the $100 million is actually an expenditure and a partial subsidy for home ownership. It has the same impact on the state’s budget as any other subsidy in that all taxpayers contribute to the General Fund and then a small segment of New Jerseyans get to take from the pool. Whether the government issues a check or deprives itself of the revenue in the first place is inconsequential.

The state and federal government already give benefits to homeowners through the tax code, such as the mortgage interest deduction. At worst, further subsidies of the real estate market distort consumer choice and partially re-inflate the housing bubble by creating artificial demand.

Even in a best-case scenario, this subsidy would minimally affect New Jersey’s economy. The nonpartisan Office of Legislative Services estimates that the portion of the credit dedicated to existing home sales evaporates with less than 2,000 transactions per year. That represents less than 2% of all existing home sales in New Jersey, even in a down economy. However, most of these 2,000 sales would not represent new activity. The legislation simply doles out money on a first come, first served basis, meaning the overwhelming majority of those transactions would have occurred regardless of Trenton’s action. This is especially true with this tax credit because it would come on the heels of a recently expired and similar federal program. In fact, much of the decline in home sales is because the federal program altered the timing of home sales, but not overall activity. There is no reason not to expect a similar outcome in New Jersey.

The largest portion of the $100 million would be reserved for New Jerseyans who purchased a newly constructed home. Once again, this mostly subsidizes transactions that would have moved forward anyway, and would apply to already-existing vacant homes or homes under construction. The construction industry would barely be affected by the credit. To the extent the law would influence behavior; the homebuyer tax credit has several potential pitfalls. One of the most significant is that it would give a homebuyer reason to purchase a new house instead of one currently occupied. This arbitrarily punishes individual sellers.

The $100 million in new spending comes at a particularly troublesome time. The governor and lawmakers budgeted a fiscal year surplus that is too thin to be considered prudent, and may disintegrate later this year. The portion of the spending allocated to future years only exacerbates a projected deficit.

If legislators feel compelled to support the real estate market, they can help remove obstacles unique to New Jersey by taking action on items such as a toolkit that enables mayors and school boards to keep property taxes down. In Washington, the recently-passed financial reform bill could be expanded to include greater restrictions on Fannie Mae and Freddie Mac, which inflated the housing bubble that helped create this recession.

Taxpayers deserve public policy that keeps the tax base as broad and low as possible in order to promote economic growth. A homebuyer tax credit flies in the face of that at little to no benefit to the economy.

This op-ed was printed in the Asbury Park Press, The Record (Bergen) and on www.NewJerseyNewsroom.com. It first appeared on CSINJ.org