Renew the Homebuyer Credit?

The stimulus first-time homebuyer credit is set to expire on November 30th of this year. For those of you who are not familiar with this credit, it is an $8000 refundable tax credit for anyone with an AGI less than $150,000.

This credit has cost approximately $15 Billion and over the course of the past year home prices have started to stabilize nationally and sales have begun to outpace listings.

However, nationally, home prices are down about 11% over the last year, and a recent study by Brookings Institute found that 85% of the home sales would have occurred regardless of the credit. This means that the government spent roughly $43,000 a piece for the additional 350,000 home sales. This is a hefty subsidy for these additional sales, and represents a windfall for the other 2M home buyers this past year who claimed the credit.

Senator Johnny Isakson (R-GA), who incidentally made his fortune in selling real estate and has remained a friend of the National Association of Realtors, along with Chris Dodd (D-CT) have proposed extending the credit into 2010, doubling it to $15,000 and raise the income limits to $300,000. The cost of this credit is expected to be approximately $30B.

Raising the income limit only adds an additional 5M households into the mix, therefore, it is unlikely to drive a large number of increased housing sales (beyond those whom would already buy a house anyways in 2010) simply because of the small pool of additional people. Furthermore, as indicated above, housing prices have year-to-year fallen on average of 11%. This is roughly $14,000 of free, market based, subsidy that has already been built in and is arguably driving as much sales growth as the smaller credit over the past year. Finally, despite housing prices falling $14,000 over the last year, this includes the $8000 subsidy built in in the form of an inflated price. As soon the subsidy ends (and it will have to at some point), all housing prices will in effect drop by the subsidy amount. Therefore, by extending the credit for a year, this drop in actual home prices will come just as prices may be turning around.

If those receiving the credit are facing artificially inflated housing prices, who is seeing the benefit of this subsidy. Well, and additional $8000 in sale price results in roughly $500 in additional real estate agent commission. Thats certainly why NAR is behind extending the credit, who cares if the country goes an additional $30B in the hole, I made an extra $500 on a sale. The rest of the subsidy is going to current home owners, through an inflated sale price. But this whole problem is that there are too many houses on the market in the first place. This subsidy is therefore encouraging more homes on the market rather than removing the backlog of homes currently for sale.

If the government is committed to spending 30B in 2010 to increase home sales and home prices, why not invest that in immigration? Part of the problem is that many regions are overbuilt and home ownership (home borrowership) had been inflated to higher than sustainable levels. We don't need a government handout to turn renters into buyers, we need MORE buyers in the first place and the only way to quickly achieve this is through immigration.

Immigrants, and particularly the highly skilled H1B visa immigrants are one of the most entrepreneurial demographic groups. They come to the US to fill highly skilled and technical jobs that simply can't be filled by people already here, work for a few years, establishing families and friends along the way, before often leaving those original companies to form spin-offs or new technological ventures.

This year (2009) the US spend 151M on citizenship and immigration. http://www.whitehouse.gov/omb/rewrite/budget/fy2009/homeland.html
A fraction of 30B could be spent to streamline citizenship and visa programs, as well as expand them to enable to make US immigration attractive not only for the opportunities offered here, but for the ease and speed of our immigration and visa process.

Paul Ryan's "Alternative Budget"

Rep. Paul Ryan (R - Wis.) is the ranking Republican on the House Budget Committee. He has introduced his "alternative" budget in competition to the one requested by the President. Now this budget (along with the president's) doesn't have much meaning as the actual budget is generally hammered out through the appropriations bills that will be passed over the coming year.

His WSJ op ed from introducing the budget is here:

The GOP's Alternative Budget: President Obama offers us the option of European big government
http://online.wsj.com/article/SB123854083982575457.html

A summary of the proposed budget is here:
http://www.house.gov/budget_republicans/press/2007/pr20090401_gopbudget.pdf

A brief review of Rep. Ryan's plan includes the following main points

1) Capping spending to a set % of GDP (specifically 18.3% - which I think comes from some study that found this to be an optimal balance for economic development)

2) Reforming Social Security/Medicare

3)Increasing Domestic Oil, NG, and Coal production, but earmarking the funds from those leases for research and building of wind, nuclear, and other non-fossil fuel energy

4) Simplifying the Tax code to have three brackets 0% (personal and standard deductions) <$15,000, 10% <$50,000, everything else %25. (double for married) Reducing the corporate tax rate from 35% to 25%.

A lot of this is a watered down version of Ryan's "Roadmap for America" that he put out a year ago.

http://www.house.gov/budget_republicans/....ntirereport.pdf

Frankly, the "Roadmap" was much more interesting proposing things such as eliminating the income tax completely in favor of a European style VAT.

-But I suppose that wouldn't have meshed well with his WSJ subtitle.

It will be interesting to see if any of these ideas take hold, and become parts of a new Republican fiscal policy.

Ryan's budget plan is an extension of the recently released "Republican Road to Recovery" plan. 
http://www.gop.gov/solutions/budget/road-to-recovery-final 
This budget plan has received a fair amount of criticism and even comparisons to "underpants gnomes" for its lack of explanation of how these goals will be accomplished.
http://en.wikipedia.org/wiki/Underpants_gnomes


http://business.theatlantic.com/2009/04/paul_ryans_crazy_budget_graph.php

I can never figure out why people resort to hyperbole or misinformation to make their points. If the situation is as bad as you claim it to be, then just use the actual numbers that you know. Its looking more like Ryan has cost himself some credibility by making his projections out 60 years.

Now to be fair to Ryan, I think that his basis for the "Democratic Budgets*" is projected escalation of Social Security and Medicare spending. These are real potential costs and something that must be corrected, but the graph is really a reflection of the pending problems with our Social Security/Medicare system rather than a reflection of specific budget decisions by D's or R's.

Personally, I like the proposed cap to spending tied to GDP. If the budget process involved defining specific number and dividing that number amongst each budgetary concern, it would be more understandable to the public and a more straightforward debate. Rather, each budget is [seemingly] negotiated in a vacuum, and it doesn't really matter if you trim a billion from the education bill if you add an extra billion to the ag bill, rather divide up the baby upfront and determine what can be done with it later.

I'm not really with Ryan on his Energy policy proposal. I'm all for increasing domestic oil production if it is economically feasible, I'm not for selling oil leases that aren't going to be tapped for decades at a loss just to get them sold. Furthermore, "Energy Independence" is one of the worst public policy tag lines of the last decade (along with "brain drain"). Rather, as a matter of national security we need to keep buying cheap oil from the Middle East and buying up Chavez's sour reserves.  

Others have picked up on the wider implications of increased US Spending as a % of GDP.

http://network.nationalpost.com/np/blogs....pportunity.aspx

Ouch. That hurts coming from a Canadian.

But serves once again as a reminder that nothing requires the US to stay on top of the heap, and if we don't take action to resolve our budget problems, more and more countries will gain a competitive advantage. 

 

Federal Government ROTing our Country

I found a chart (albeit from 2005) that listed federal expenditures per state based on the amount of federal taxes paid by that state. I used this to produce a Return of Federal Dollars index. I'll call it ROT for Return on Taxes.

http://www.nemw.org/taxburd.htm

An examination of the ROT index identified that certain states were "givers" taking in less federal money than it paid in taxes while other states were "receivers," taking in more federal money that they put in. There were 17 total "giving" states, in order of ROT:

New Jersey .65
Nevada .67
Connecticut .73
Minnesota .73
New Hampshire .75
Illinois .78
Delaware .80
California .80
New York .82
Colorado .83
Massachusetts .85
Wisconsin .88
Washington .89
Michigan .94
Oregon .93
Florida .95
Texas .97

I'll compare this to the top 17 "receiving states"
Mississippi 2.02
New Mexico 2.00
Louisiana 1.85
Alaska 1.83
West Virginia 1.75
North Dakota 1.65
Alabama 1.63
Kentucky 1.51
Virginia 1.51
South Dakota 1.48
Hawaii 1.43
Montana 1.43
Maine 1.41
Arkansas 1.40
Oklahoma 1.35
South Carolina 1.35
Missouri 1.32

When the states are grouped by geographical region:
Northeast .89
Midwest .91
South 1.19
West .95

In all, the South as a region received an additional $120B in federal spending than it contributed through taxes. Therefore, on a per-capita basis, the Federal Government is undergoing a massive redistribution of wealth from the rest of the country into the South. 

Alternatively, we can look at the generic political makeup of the states on the "giving" list versus the "receiving" list. The "giving" list is made up of predominantly Democratic leaning states (exceptions: Nevada, Florida - Purple; Texas - Republican) while the "receiving" list is made up of predominantly Republican leaning states (exeption: New Mexico, Virginia - Purple; Maine - Democratic). Now to draw more accurate conclusions, I would need to compare a few years of data to evaluate if this was based upon the Republican control of government in 2005, or if there is something more structural regarding this wealth transfer. However, the strength of the line drawn between the recent political leanings of a state and its share of government money is compelling. If the size and expense of government is a defining difference between D and R politics (I know a lot of people would disagree that there is any distinction in this matter between the two, but go with me for a second), the political leaning of the states may actually reflect this, whereby the "giving" states see comparatively less federal government investment than they pay for and therefore have the belief that the federal government is not doing enough, while the "receiving" states see the generous returns of federal money into their states and feel that the government spending should be reined in.
Two possible sources of the additional money may be federal highway and agricultural subsidies. Typically, our largest states are also our least populated, or at least have the lowest population densities and have large agricultural systems.  With our ever expanding federal highway system, it simply costs more per person for federal highway construction and maintenance in large states than in small states.  The government spends a lot on agricultural subsidies and as agriculture requires land, it is reasonable to assume that these tend to be correlated to land area, rather than population.  I couldn't find any statistics, but this article seems to support the federal highway system theory. http://www.redorbit.com/news/technology/....for/index .html At least it supports the idea that California, New York, and Texas received less per capita (all listed as "givers") in federal highway funds than Alaska, Wyoming, Montana, North and South Dakota and Vermont. (Alaska, Montana, North and South Dakota are all in the "biggest receivers" category). However, Federal Highway expenditures are funded through the separate $0.184/gal. Federal Gas Tax. However, assuming that the highest population states are going to buy the most gallons of gas, States' returns on federal gas tax should be similar to the returns on income tax.

Tax Day Thoughts

Death and Taxes, right? Well, it seems that any solution to our country's looming fiscal problems (current economic downturn aside) will require not only rethinking government spending, but also government revenue collection.

I understand the benefits of our progressive income taxation system. It helps to balance the burdens of other flat, or regressive, taxation systems currently in place such as sales taxes and vehicle registration fees. Also, on a dollar for dollar basis, the those tax dollars paid, even in a smaller amount, cause more burden on those at the bottom of the pay scale as opposed to those at the top.

However, my biggest complaints regarding the tax code come from the sheer number of people who are now exempted from the tax code. Early estimated numbers for 2009 indicate that over 40% of the population will pay no or negative federal income taxes. Interestingly, a recent poll found that 56% of Americans thought that their taxes were too high. This means that basically everyone who paid taxes this year thought that they had to pay too much. In a setting where nearly half of the population is paying no or negative taxes, It is understandable that those that do pay taxes thought they were asked to pay too much.

With such a large segment of the population having no "skin in the game" of funding our federal government, how can their priorities be aligned with a fiscally responsible government? The federal government becomes one big entitlement program that much of the population doesn't have to pay for, but receives benefit from.

In that situation it is easy to support increased government spending - I'm not paying for it, but I get the benefit from it - why would you turn down something free?

Ari Fleischer, whom you can agree or disagree with his politics but can't deny his talents at spin, recently had similar comments in the WSJ.

http://online.wsj.com/article/SB123958260423012269.html

I would have preferred that he focused on effective tax burden of the bottom half of wage earners, rather than percentage of total federal revenue, as I think that those data are more reflective of the actual situation, since wage percentile isn't as important as actual income.

My other thought is against refundable tax credits. This seems like a very inefficient way of providing redistribution of wealth. First of all, assuming that we want a direct redistribution such as this (big if), it comes in the form of a single payment, rather than throughout the year when it can be integrated into someone's budget and it requires the completion of an overly complex 1040 income tax form. If the money is going to be distributed anyways, why not send it out like social security or reduce payroll taxes?

Second, combining with the first point, it is paying people to be a part of the country, without any restrictions on its use. The same dollar amounts directed into job training, primary education, health charity, or nutrition programs would serve a directed purpose and further a country wide goal of moving people into a situation where they no longer need these support services.

H1-B Visas and "Stimulus"

Immigration is highly regulated by the federal government, not that you would know it from the headlines or your favorite cable news network.

One specific type of visa is the H1-B visa which is specifically available for "workers in short supply" meaning highly skilled technical employees that perform jobs that there are literally unable to be filled because there are not enough US citizen employees with the necessary high-tech skill sets. Often the foreign workers that fill these visas are in fact the products of our own US Universities.

However, the capped limit of these visas has not increased in years from its current level of 85,000. Applications for these visas are submitted every year on April 1st and are often filled within a matter of days.

But with the current downturn, lawmakers are easily succumbing to the urge to pass protectionist measures at every turn. One such measure limited any companies receiving TARP funds from applying for H1-B Visas.

Now the problem with this is that the highly skilled workers represented by the H1-B Visas perform the jobs that will pull us out of recession. For every highly skilled worker that a company employs, it generally employs multiple lower skilled employees as support. These aren't crap jobs either, these are lab technician, computer programming, grant writing, office management positions, intellectual property jobs.

But it goes beyond a strict calculus of jobs, H1-B Visa employees are also much more entrepreneurial than the average American worker. Therefore, after they have worked in these high tech positions and learned from their employers it is highly likely that they will spin off from their employer to create a new business venture. This is a function not of their nationality, but of their high level of education and specialized (and valuable) skill sets. Thus, with these workers, our country is importing economic development. This is the last import that we want to be restricting during a recession.

Now the current worldwide downturn has leveled some of the playing fields, the first worldwide economies to get going again will undoubtedly be working from a position of strength for possibly the next 50 years. At the same time that the US is shutting these valuable workers out, other countries, often their home countries, are developing the resources to put them to work elsewhere. The longer that the US pushes these workers away, not only do they forgo the economic development caused in the short term by these workers, but they undermine the US's position in the world of where the best and brightest want to be to seek their fortunes.

While in general, immigration restrictions should be opened up to more individuals, this specific type of immigration is far more necessary than our leaders seem to acknowledge. 

Jeffery Joerres, CEO of Manpower, Inc. apparently agrees with me.

In a reluctant foray into politics, Mr Joerres says the US is shooting itself in the foot by having too low a limit on the number of non-immigrant visas it issues, meaning that the work permits tend to run out by May every year.

"That's just wrong," he says. "The growth of this country came from people who were not American but were classically American - who came here from another country with an idea, developed it and created employment. Two-thirds of Silicon Valley companies were started by people not born in the US."

http://www.ft.com/cms/s/0/63c190a6-4f0b-....?nclick_check=1

Line Item Veto

A line item veto allows an executive to veto portions of legislation "line-by-line" before signing it into law. Currently a vast majority of state governors (43?) have some form of a line item veto power.

Congress previously passed a line item veto power for the president in 1996. The Line Item Veto Act of 1996 was struck down by the US Supreme Court in 1998 in the case of Clinton v. City of New York.

The previous Line Item Veto Act was ruled unconstitutional for failing the "presentment" clause of Art. 1, section 7 of the Constitution. The presentment clause states that once the president is presented with a bill, "if he approves, he shall sign it, but if not he shall return it (veto), with his objections". The Supreme Court reasoned that these are the only and exclusive options available to the president and apply to the bill in its entirety. Therefore, what the president signed into law after using a line item veto was not the same bill as was originally presented.

John McCain, Russ Feingold, and Paul Ryan have introduced a new Line Item Veto Act. The goal of the veto is the same as it was before, "to curb 'pork barrel' spending."

The proposed procedure is a little different, as the sponsors hope that this would meet Constitutional scrutiny. However, Feingold and McCain have little respect for the Constitution anyways, so I can't imagine that they spent much time checking this one out either.

http://en.wikipedia.org/wiki/Bipartisan_Campaign_Reform_Act

From what I have read so far, the new proposed line item veto is actually a "rescission power" whereby by "vetoing" an element of the bill, the president in his Executive power is refusing to fund the item. Congress then has a fast track ability to introduce a separate bill to specifically fund the item.