By Steven Pearlstein
Friday, April 4, 2008
Hold on to your wallets, Mr. and Mrs. America, Max and Chuck are at it again.
Yes, our favorite sugar beet socialist and cornhusk communitarian have decided to ride to the rescue of the nation's troubled housing sector.
It all started on Monday when members of the Senate returned to Washington after another two-week recess in which they apparently discovered that voters actually expected them to do something about the housing crisis rather than just talking about it until the next recess. So Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa), the chairman and ranking member, respectively, of the Senate Finance Committee, took the opportunity to dust off a quartet of stinky tax breaks that had been rejected by the House and the Bush administration back in February, when Congress was scrambling to show that it was doing something about the gathering recession.
According to congressional tax experts, these tax breaks would cost the Treasury about $28 billion in lost revenue over the next three years, which is a chunk of change, even by federal budget standards. And while some of that might be recouped in the form of higher tax payments in the future, you know tax lobbyists are already burning the midnight oil to make sure such a thing never happens.
One of the provisions would provide a $7,000 tax credit to anyone who buys a house in foreclosure. This won't do a thing to avoid foreclosures, or put a dime in the pockets of owners who lose their homes. But it will provide a direct subsidy to banks and other lenders who, to sell their newly acquired property, would otherwise have to lower the price by another $7,000. Now, thanks to Max and Chuck, they won't have to.
But wait, it gets worse. If you're a homeowner or builder trying to sell a similar house in the same neighborhood, your buyers would not be entitled to the tax credit. So that means that, thanks again to Max and Chuck, you could lose a sale or have to lower your price $7,000 to compete.
Pretty neat, huh?
Another provision would make it possible for taxpayers who don't itemize their deductions to get a $500 deduction ($1,000 for couples) for state and local property taxes. This would mean even greater subsidies for homeowners, on whom we already lavish billions of dollars in tax breaks each year, including the granddaddy of all, the mortgage-interest deduction. While they put a time limit on this provision, the odds are pretty good that Max and Chuck will be back early in 2009 with an extension to this $1.5 billion-a-year goodie.
There's also authorization for states to issue an additional $10 billion in tax exempt bonds that, in theory, could be used by state housing authorities to refinance subprime mortgages at below-market rates. But if Max and Chuck had bothered to check, they would have discovered that interest rates on tax exempts are running higher than they are for taxable federal bonds. So don't look for too many states to go rushing to market with those issues.
The worst and most expensive of the tax breaks were those pushed by the home builders who made record profits during the housing boom but are now hemorrhaging cash. Basically, they would allow any company to take their tax losses from last year, this year and the next, and apply them to their profits of the previous four years rather than the two years now allowed under tax law.
The effect of the provision would essentially allow home builders to get back some or all of the taxes they paid during the years of record profits. No doubt that will be much appreciated by home builders and their shareholders, and maybe even their creditors. But because it won't lower prices or stimulate demand, it will do nothing to stimulate housing sales or production or create a single construction job.
But it's even worse than that. This provision doesn't just apply to home builders -- it's a boon to every company that is losing money now but made huge profits in the preceding four years. And that could include any number of banks, investment banks, mortgage bankers and hedge funds.
Indeed, the irony is that one of the biggest winners from all this may be J.P. Morgan Chase, which is knee-deep in balance-sheet write-downs since its shotgun marriage last month with Bear Stearns. It was only last week that Max and Chuck were all hot under the collar because of risks assumed by the Federal Reserve as part of that controversial transaction. But whatever government subsidy might be triggered by the Fed's involvement should pale compared to the value of the tax break that J.P. Morgan has received as a gift from Max and Chuck.
All this will do little to solve the housing crisis, but it may help to alleviate the campaign funding crisis created when these same tax provisions were jettisoned from the economic stimulus bill. The angry and ham-handed response from Brian Catalde, the president of the National Association of Home Builders, was to very publicly announce the indefinite cutoff of all contributions to federal candidates. Were those same provisions to be enacted now, it would be a stunning acknowledgement by members of Congress of the direct connection between political money and legislative outcomes.
Steven Pearlstein can be contacted firstname.lastname@example.org.