Stimulus: Senate Tacks on Home, Auto Incentives

Lawmakers worked late Feb. 5 and through the day Feb. 6 to find billions of dollars of spending cuts in the Senate version of the economic stimulus bill. The goal: to arrive at a compromise that would pass with at least mild bipartisan support and move President Barack Obama closer to his goal of signing the stimulus into law by Feb. 13.

By early evening Friday the Senate had reached a tentative deal on what CNN described as a $780 billion package, after hours of bargaining and haggling.

But even as Republican leaders and a handful of Democrats had complained the bill contained too much spending, some of the most significant changes senators have agreed to so far will add billions to the bill's price tag: tax credits of $19 billion to boost home buying, and another provision costing $11 billion to help the ailing car industry. Whether those consumer-friendly provisions will do what's intended—revive moribund home- and car-buying activity—is up for debate.

The tentative deal came on Feb. 6 as President Barack Obama stepped up pressure for Republican support, pointing to a grim jobs report released that day showing that the national unemployment rate rose from 7.2% in December to 7.6% in January. "These numbers demand action," said Obama.

Proposed Tax Credit for Home Buyers

On the face of it, the tax incentives that were added this week should make it a lot more attractive to buy a home or vehicle.

The housing amendment, introduced by Senator Johnny Isakson (R-Ga.), gives $15,000 (or 10% of the purchase price, whichever is lower) to every person who buys a home in 2009. In theory, the measure—approved unanimously by the Senate on Feb. 4—would bring more home buyers into the market, helping stem the decline in home values. That would help address the root cause of the financial crisis: crumbling home values and rising foreclosure rates. And it would free up middle-class individuals to spend money elsewhere in the economy. Another amendment, to use federal dollars to provide 4% mortgages for new and existing homeowners, was voted down.

Isakson puts the cost of his tax break at $19 billion. "It is time to fix housing first," he said on the Senate floor. Supporters have started a Web site promoting the proposal.

The housing amendment passed a day after the Senate voted in favor of the Auto Assistance Ownership Amendment. That allows car buyers to claim an income tax deduction for the cost of automobile sales taxes and interest payments on car loans. The tax break would apply to the first $49,500 in the price of a new car purchased between last Nov. 12 and Dec. 31, 2009. Consumers with incomes of up to $125,000 and couples earning as much as $250,000 could qualify.

The amendment's sponsor, Senator Barbara Mikulski (D-Md.), said the plan would help the battered auto industry as well as create jobs. "I believe we can help by getting the consumer into the showroom," she said.

Creating Artificial Demand?

But critics doubt that either the home or car measure will stimulate enough demand to haul those industries out of their doldrums. They suggest many of those taking advantage of the programs would probably have bought homes or cars without the tax breaks. And some economists say it's a bad idea to reinflate the housing and auto industries with artificial demand; both sectors suffer from overcapacity, they argue, and need to find a market bottom before prices will stabilize.

"Giving incentives [to buy a car or home] won't work if people are worried about losing their jobs or about the value of that asset declining," says Rajeev Dhawan, director of Georgia State University's Robinson College of Business. Senator Charles Grassley (R-Iowa) argued that even if the car incentive proposal worked, it would only increase consumer debt, which is already weighing on the economy.

Critics of the housing program worry that it won't generate enough demand to plug the foreclosure gap—or, if it does, that it will cost much more than $19 billion.

Dhawan says the plan has problems at both the high end and the low end of the housing market. On the higher end, $15,000 represents a drop in the bucket on the purchase of such a large asset that could depreciate significantly more than that. And even if lower-income individuals wanted to buy a home—which is unlikely given the state of the job market and economy—they would have trouble getting loans.

"How are those at the lower end [of the market] going to get financing?" asks Dhawan. "The banks aren't lending."

Cost Estimate Challenged

The credit is unlikely to generate enough demand to halt the tide of foreclosures, says Barbara Sard, director of housing policy for the Center on Budget & Policy Priorities. Using data from the Mortgage Bankers Assn., the Center for Responsible Lending on Feb. 5 estimated that nationwide 46,600 foreclosure proceedings now start every week. Total U.S. foreclosures are expected to reach 2.4 million this year, according to the data.

Others question Senator Isakson's cost estimate for the program. Dean Baker, co-founder of the Center for Economic & Policy Research, a Washington think thank, says that even in a weak housing market this year, it's likely about 5 million homes will be sold. Assuming those individuals qualify for the full credit, the program would cost at least $75 billion. "It seems a total waste of government money for no reason," says Baker.

Senator Isakson contends, though, that a similar plan worked in the 1970s. Amid a housing crisis at that time, Congress passed a $2,000 tax credit for anyone buying a new home for their principal residence. Isakson says it helped reduce housing inventory and stabilize home values.

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