Suppose you're trying to sell your house when a home down the street has a sign proclaiming, "Foreclosure. Priced to Sell."
You're probably already upset because the foreclosure likely has driven down the value of homes in the neighborhood. Then you learn that a law has just been passed giving a $7,000 income tax credit to anyone who buys a foreclosed property, further undercutting your asking price.
That misguided tax provision isn't on the books yet, though it might be later this year.
It's part of a deal that includes $29-billion in tax cuts through 2010 that are intended to give the battered housing market a boost. Senate leaders agreed to it April 2.
Another part of the bipartisan deal would be a new $1,000 standard deduction for people filing joint income tax returns that pay state and local property taxes and can't deduct them because they don't itemize. Individual filers would get a $500 deduction.
However, the revenue loss due to the foreclosure purchase credit and the new standard deduction would be chicken feed compared with a third provision. More than $25-billion would be handed out to home builders over a three-year period in the form of rebates of income taxes paid during the height of the housing boom.
The proposal would let home builders carry net-operating losses incurred in 2008 and 2009 for four years instead of just two as the tax code now allows.
"These tax provisions will keep property values up, keep folks in their homes and keep businesses afloat, and those are all keys to handling the housing crisis," said Senate Finance Committee Chairman Max Baucus.
No, they're not keys to handling the housing crisis.
At best, they would be a waste of taxpayer money. At worst, they might delay some of the adjustments that have to occur before the housing market can stabilize.
The $7,000 credit, which would be paid over two years, is as likely to depress values as to prop them.
Why provide a credit to a buyer that's also going to help a lender sell a property when a hard-pressed homeowner in the same neighborhood is also trying to sell his property, possibly to avoid a foreclosure? Might that other owner not feel pressure to lower his asking price?
As for a standard deduction for property taxes, most of the benefit would go to the majority of homeowners who are in no danger of losing their homes. And the amount of money is far too small if a foreclosure is looming.
Like the credit for someone buying a foreclosed property, the income tax break for home builders could actually extend the crisis. Avoiding the sale of land and the inventory of unsold new homes is exactly the wrong thing.
This legislation known as the "Foreclosure Prevention Act of 2008" should be called the "Home Builder Bailout Act."