Policy Documents

Research & Commentary: First Time Home Buyers Tax Credit

Matthew Glans –
October 20, 2009

Federal legislators and many industry groups are calling for not only an extension, but a fourfold expansion, of the First Time Home Buyers Tax Credit program, at an estimated annual cost of $50 to $100 billion.

The tax credit, originally signed into law as part of the $800 billion American Recovery and Reinvestment Act, was designed to increase home ownership and help people make the transition from renting to owning. But industry groups estimate some 80 percent of the borrowers using the credit likely would have bought a home anyway.

David C. John of The Heritage Foundation says the tax credit rewards irresponsible buyers and homebuilders, and that home construction has suffered because the bill made the market look healthier than it actually was: "Homebuilders who ignored signs that the market was slowing and built houses in hopes of finding a buyer would get assistance in selling houses that should not have been built in the first place," wrote John.

Ted Gayer of The Brookings Institution cautions the tax credits are not free: "The billions of dollars spent on the tax credit will ultimately have to be paid back through higher, economically distorting, taxes."

The government's earlier efforts to encourage home ownership through programs such as Fannie Mae, Freddie Mac, and the FHA were a key cause of the housing bubble that led to the current economic downturn and the collapse of credit markets. The First Time Home Buyers Tax Credit is another example of the government encouraging home purchases by families unable to afford them.

The tax credits are popular among the home buyers and housing industry insiders who benefit from them, but they are not in the best interest of taxpayers or the U.S. economy.

The following articles examine the home buyers tax credit and the American Recovery and Reinvestment Act from a free-market perspective.

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The Isakson Tax Credit: Another Approach that Won't Fix the Mortgage Mess
http://www.heritage.org/Research/Economy/wm1873.cfm
David C. John of The Heritage Foundation discusses several of the weaknesses of the home buyers tax credit and advises against any rash actions to address the housing crisis.

Should Congress Extend the First-Time Homebuyer Tax Credit?
http://www.brookings.edu/opinions/2009/0924_tax_credit_gayer.aspx
Ted Gayer of The Brookings Institution examines the home buyers tax credit, commenting on its cost and effect on the market as a whole.

More on Subsidies for Homebuyers
http://www.taxfoundation.org/blog/show/25001.html
Mark Robyn of the Tax Foundation comments on the tax credits and criticizes the government's excessive subsidization of home ownership.

More Bad Ideas for Housing Tax Credits
http://www.taxfoundation.org/news/show/23073.html
Gerald Prante of the Tax Foundation discusses several aspects of the Isakson plan, focusing on its effect on the price of housing.

Should the HomeBuyer Tax Credit Be Allowed to Expire?
http://www.time.com/time/business/article/0,8599,1926223,00.html
Barbara Kiviat of Time magazine examines the tax credit debate, discussing the program's possible emergence as a new entitlement.

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Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute's Web site at http://www.heartland.org and PolicyBot, Heartland's free online research database.

If you have any questions about this issue or The Heartland Institute, you may contact Matt Glans at 312/3774000 or mglans@heartland.org.