When You Are in a Hole

The Sacramento Bee reports that a bill originally held in Senate Appropriations out of concern for the budget shortfall may be on the move. This bill would increase availability of the $10,000 tax credit for purchase of a “qualified principal residence” established as part of the February budget agreement. Creation of the credit raised some eyebrows in February for a number of reasons and the recent expansion of the credit should raise even more. First, the Legislature authorized $100 million in tax credits at a time when deep cuts were made to virtually all areas of the budget. Second, the credit is only available to purchasers of never-before-occupied houses, thus providing an incentive for purchasers to buy a new house, rather than the home that might best meet their needs or fit their budget. This led many to characterize the credit as a handout to developers (more on this later…). Finally, the credit was structured in such a way that it could only be fully utilized by very high-income households – the $10,000 credits would shelter $107,527 of taxable income. Receiving the full $10,000 benefit would require a much higher income, since taxpayers also claim personal and dependent credits and other deductions.

This time around, AB 765 (Caballero) recognizes the fact that most Californians can’t take full advantage of the credit and would allow the Franchise Tax Board to approve additional applications for credits – the program was fully subscribed several months ago – thus increasing the actual revenue loss to the state relative to current law. But the bill fails to take into account the fact that there is little or no evidence that the credit will do much more than transfer dollars from the state treasury to developers’ pocket books. Writing in the August 2009 edition of the State Controller’s Statement of General Fund Cash Receipts and Disbursements, economist Chris Thornberg notes that:

“Sacramento shockingly enacted a $10,000 tax rebate check for purchasers of new homes in the state even as it tipped towards insolvency. The bill was touted as a job creator by the industry, but with little justification, and sales of new units have continued to fall. New home sales are now down 35% from last year, as opposed to 25% up for all units. The reason for this is simple — builders have been remarkably resistant to market pressures. While the prices for existing homes have returned to 2001 levels, prices for new homes are still 22% above this benchmark. In other words, all these sales and more could have occurred without any money from the state if builders had just collectively lowered their prices by the $40,000 needed to keep up with price declines in existing homes.

Similarly, claims that the rebate program would create jobs were empty. Building permits have continued to fall from a peak of 20,000 units per month to a seasonally adjusted low of 2,500 units in May 2009.”

At a time when the state’s finances are more strapped than ever, remember that old adage that we’ve blogged about here before, “when you are in a hole, the first thing to do is stop digging.”

— Jean Ross

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