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Smarter Dumb Tax Policy

All right, let’s acknowledge up front that the $8,000 first-time home buyer’s tax credit, enacted as part of the federal stimulus package, is poor tax policy. It’s untargeted--one estimate suggests that as many as four out of five buyers would have purchased homes without the credit, but got handed the $8,000 anyway. It’s expensive--it will probably cost on the order of $15 billion this year. And U.S. homebuyers get all manner of tax breaks anyway--deductions for mortgage interest and state and local taxes, an exclusion for capital gains--not to mention tax subsidies for Fannie Mae and Freddie Mac, now effectively owned by the government.

But now it seems like extension of the stimulus credit is on the fast track. Proponents argue that it’s needed to prop up a still-weak housing market. Some argue that the credit should be increased to as much as $15,000, or extended to all homebuyers rather than just first-time buyers. Perhaps the Democrats will support the credit’s extension in part to gain Republican support for extensions of other, more targeted stimulus policies--unemployment compensation and health insurance for the long-term unemployed.

The discussion, however, overlooks the fact that house price trends across the country are highly uneven. Some metro areas like Las Vegas (coincidentally, in Senate Majority Leader Harry Reid’s home state) have been absolutely battered, suffering a 25 percent decline in prices over the past year. Many others like Houston have actually seen prices rise, by as much as 5 percent over the same period. In Las Vegas, an $8,000 credit might not be quite enough subsidy to right the ship. But all $8,000 does in Houston is inflate prices in an already healthy market.

If politics require that the credit be extended, then why not do it in a less dumb way? The federal government collects quarterly data on metropolitan home price trends. Why not use those data to modify the generosity of the credit based on where the purchase occurs? If prices are down more than 15 percent in the local market, perhaps the credit should be worth $12,000 or $14,000. You probably have to provide something to the healthy markets to make the politics work, but perhaps the credit in those places should be worth only $2,000 or $3,000. The law would establish a formula for calculating the appropriate subsidy level based on these federal housing data, and the IRS would publish tables on its website detailing the credit available for each metropolitan (or non-metropolitan) housing market.

To be clear, this geographic targeting wouldn’t address many of the problems inherent in a homebuyer tax credit. It would, however, recognize the fact that in housing, like a lot of other things, we’re a big and diverse country. If the purpose of this credit is to stabilize the housing market, let’s stabilize the metropolitan markets that really need it, and avoid overheating the ones that don’t.

  • Alan Berube is senior fellow and deputy director at the Brookings Institution Metropolitan Policy Program, and co-author of Confronting Suburban Poverty in America (Brookings Press, 2013). He has authored numerous Brookings publications on topics including metropolitan demographic and economic trends, social policies affecting low-income families and communities, and cities in the global economy.