The current recession has seen many attempts by the government to stimulate the economy and help restore some measure of prosperity to American taxpayers. Several of these have shown up in the tax code itself, like the recovery rebate credit under George W. Bush, or the sales tax credit for new vehicle purchases championed by the Obama Administration.
With the month of July, President Obama has placed his signature on a new piece of stimulus legislation, the Homebuyer Assistance and Improvement Act. In this month’s newsletter I want to take the opportunity to briefly explore what it means to all of us.
The key provision of the act extends the deadline for purchasing a new home and qualifying for the first-time homebuyer credit until September 30, 2010, provided the taxpayer entered into a binding contract before May 1 (the previous closing deadline was June 30, 2010). The reason for this extension is that it has been taking longer than usual for buyers to close on their homes, due to delays in the funding of loans on the part of banks and mortgage companies.
This will have the effect of putting hundreds of thousands of dollars into the pockets of countless homebuyers, stimulating the housing, real estate and finance industries and hopefully triggering increased spending of at least some of those dollars in the broader economy. Congress estimates that this benefit will cost some $140 million over the next ten years. However, to prevent this price tag from deepening the federal deficit, Congress also plans to pay for it in three ways.
The first is rather complicated and involves implementation of the Travel Promotion Act, which was designed to use the “power of travel to serve as an economic stimulant, job generator and diplomatic tool” by promoting the United States as a travel destination. The program is funded, in part, by a fee of $10 charged to visitors from certain foreign countries for a special visa waiver. The Homebuyer Assistance and Improvement Act delays by one year the transfer of these fees and the start of a corresponding matching funds program, which is expected to raise $95 million over the next ten years.
The second revenue raiser is much more straightforward. Simply stated, it means that a longstanding IRS rule imposing a penalty for submitting bad checks now also applies to electronic payments. The penalty currently amounts to a two-percent tax on checks or money orders paid to the IRS from taxpayer accounts that have insufficient funds. This provision is expected to generate $48 million over the next ten years.
Third, Congress has put in place a number of provisions to prevent incarcerated taxpayers from fraudulently claiming tax benefits such as the first-time homebuyer credit, the earned income credit, and others to which they are clearly not entitled. This represents a response to a scheme some prisoners took part in that enriched them for falsely claiming the first-time homebuyer credit, at a cost to taxpayers of some $9 million. The new restrictions are not only expected to shut off that illegal pipeline, but prevent similar problems in the future, and streamline certain recordkeeping requirements for state and federal prisons, raising some $6 million over the next ten years.
If you do the math, it should be apparent that this legislation raises a total of $149 million in revenues, not only offsetting the $140 million cost of the Homebuyer Assistance and Improvement Act, but making a dent in the deficit as well. If that’s just election-year appeasement, I’ll take it!