The Lame Duck Tax Bill: Digging in The Dirt

The tax-cutting legislation rushed through a lame-duck session of Congress earlier this month has already drawn some attention for the sneaky way in which some pretty important (and bad) tax provisions were stuck in at the last minute. But yesterday's Washington Post casts a less critical eye on one newly-extended temporary tax break: a $5,000 federal income tax credit for "first-time homebuyers" in the District of Columbia. This tax break has been around since the beginning of 1997, although it expired at the beginning of 2005. This year's legislation, the "Tax Relief and Health Care Act of 2006," extends the tax credit for two years, from the beginning of 2006 to the end of 2007.

Has the $5,000 credit been effective? The Post thinks so:

Economists and real estate professionals have called the exemption a key factor in the housing boom in the District over the past several years. Del. Eleanor Holmes Norton (D-D.C.), who pushed the measure in Congress, said: "Even in today's cooling housing market, home prices are out of reach for many D.C. residents. The $5,000 home buyer credit is desperately necessary in this town today."

Of course, one could argue that the home buyer credit has had exactly the opposite effect. If home sellers are factoring the availability of the credit into their pricing, the real beneficiaries will be individuals (or developers) who are selling homes-- making house prices higher for first-time homeowners than they otherwise would be. Under this scenario, the $5,000 credit will make it marginally more difficult for low- and middle-income first-time homebuyers to break into the DC housing market-- hardly the outcome Norton (or any other DC policymaker) wants.

Of course, the real answer is almost certainly between these two poles-- sellers and buyers are getting something out of this. And it's hard to contest the idea that, for those who are lucky enough to own a home in DC, this tax break makes these homes more valuable. But the real question is whether this is the best approach to making DC a more affordable place for first-time homebuyers-- and the Post article has no insights on this question.