Does It Make Sense To End The Home Buyer Tax Credit?

Written by Phil Hall
on March 01, 2010 No Comments
Categories : Blog View

BLOG VIEW: One of the happiest memories of my childhood was the day that my training wheels were taken off my bicycle. Free of that extra level of cumbersome support, I was eager to zoom around with Lance Armstrong-worthy speed. I also fondly remember how that first two-wheel ride concluded: I raced directly into a tree, crashed wildly and fell off the bicycle.

Needless to say, I managed to get up, brush myself off, pick up the bicycle and give it another spin. Happily, I was able to figure out how to properly ride the bicycle without doing damage to myself, my vehicle or the trees.

This trip down memory lane is brought up in a comparison to the ongoing debate of whether or not to extend the home buyer tax credit that is set to expire on April 30. There are many people who want to see the tax credit extended and just as many that want to see it expire. As you may gather from my training wheels anecdote, my vote in this debate falls with those who are in favor of letting the tax credit expire.

My logic for favoring the end of the tax credit falls into three reasons. First, the credit was only intended as a temporary measure to help spur recovery in the battered housing market. It has already been renewed twice, and its effects are somewhat mixed. Indeed, an argument can be made that the tax credit is having an artificial effect on housing sales.

The Wall Street Journal noted last week that housing sales escalated last October, when it appeared that the credit was going to permanently expire. But after Congress gave the tax credit another extension, housing sales dropped in December. Thus, the tax credit gives the impression that the housing market is being propped up for as long as the federal government gives juicy incentives to consumers to go house hunting.

Second, I cannot think of a worse time in U.S. economic history to offer generous tax cuts. The federal deficit has ballooned to grotesque proportions, and the very last thing that any responsible elected official can do is to encourage the further depletion of the government's revenue stream.

Recent history has shown us that federal policies centered heavily around tax cuts only serves to feed the deficit, not bring it under control, and I am already cringing in anticipation of a fall election campaign where candidates will make grand but foolish promises of making life better with heaping tax cuts.

Yes, I know that it would also be a good idea for the government to rein in its spending. But, really, that's not going to happen until this recession is history and the economy regains its long-lost vibrancy. Don't expect that to happen in the near future.

Third, and perhaps most importantly, the elimination of the tax credit will be the important second step in the federal government's gradual withdrawal from its role as crutch to the financial services industry. (The Fed's winding down of its mortgage-backed securities purchasing is the first step.) Hopefully, more steps will be in place as the year progresses, including the long-delayed action on getting Fannie Mae and Freddie Mac out of conservatorship and the creation of policy parameters that will enable the birth of a covered-bond market.

We cannot have a vibrant free market economy when the government is blatantly supporting wide stretches of industry while frantically bribing people to make expensive purchases in the middle of a recession. An argument can be made that such action was needed to stave off a depression, but there is also the fact that such an intervention came without a clearly defined exit strategy. There is a difference between a temporary emergency action and a permanent occupation, and it would be dangerous to allow a temporary measure to bleed outside of time-sensitive limitations.

Not unlike my first misadventure without training wheels, there is the possibility that the housing market will have an initial bumpy ride without the tax credit. But ultimately, the market needs to move forward based on its own strengths and incentives. The government needs to take off the tax-credit training wheels and let the housing market move ahead on its own freewill. The market will ultimately succeed by its own power.

– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]

[i] (Please address all comments regarding this opinion column to hallp@sme-online.com.)[/i]

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