Pressure to Extend Expiring Stimulus Provisions Likely

Sep 21, 2009

Recently, Senate Majority Leader Harry Reid announced his support for the extension of the First-time Homebuyer Tax Credit by signing on as a cosponsor to a new bill that would extend the existing credit for 6 more months. “[Yesterday] we learned that new home sales have increased in Las Vegas, and that’s good news,” he explained. “I hope this credit will build on that so more Nevadans can realize the American dream of homeownership.”

The First-time Homebuyer Tax Credit was originally created last winter, offering up to $7,500 per person to encourage real estate sales amidst the housing crisis. It existed then in a similar fashion to a no-interest loan and required repayment beginning with the 2010 income tax year. The credit was then extended in the $787 billion 2009 American Recovery and Reinvestment Act, and expanded to $8,000. Furthermore, the requirement to pay back the credit was dropped, unless the home ceased to be the taxpayer’s main residence within a certain period of time.
 
The credit is scheduled to expire on November 30 of this year, but there is likely to be considerable pressure on Congress not only to extend the program, but to loosen qualifications and further increase its size, thus making the program even more expensive. Currently, there are six bills in Congress that would serve to extend the First-time Homebuyers Credit. Two of them are in the Senate and four in the House.
 
The reality is, at some point all of the provisions in the stimulus bill will expire. Congress will feel pressure to extend a number of them; sometime because there is an economic justification to do so, but often because certain members support the program independently of its stimulative effects, and sometimes because the general public dose.
 
The renewal of expiring stimulus tax and spending provisions, though, could pose macroeconomic risks. The stimulus was developed and passed as a temporary measure, and sever drops in consumption and investment made it sensible to deficit-finance its provisions. But as the economy recovers, renewing these provisions without offsets would create new costly annual expenses for the government, at a time when deficits are already too high.
 
As we noted in two blog posts earlier this month (seen here and here), the Obama administration has already begun employing some gimmicks surrounding extending these provisions, by incorporating the expansion of a few of them – particularly the Child Tax Credit, the Earned Income Tax Credit, and Pell Grants – into the baseline figures of current policy, thus allowing them to move forward unpaid-for.
 
CRFB believes that before any provision is renewed, the costs and benefits must be carefully weighed. Any provisions which are extended must be coupled with appropriate tax and spending offsets, unless there is very clear economic justification which argued for credibly temporary deficit-financing. Below we have created a chart of some of the key stimulus provisions expiring soon, and our rough cost estimates for continuing them for one year.
 
Key Expiring Stimulus Provisions and the One-Year Cost of Extension
 Program Expiration Date Cost (billions)
Making Work Pay12/31/2010$29
Alternative Minimum Tax12/31/2009$31
Individuals with Disabilities Education Act (IDEA)9/30/2011$7
Food Stamps9/30/2009$4
EITC Increase12/31/2010$2
Child Tax Credit Expansion12/31/2010$7
American Opportunity Tax Credit12/31/2010$4
Refundable First-time Homebuyer Credit11/30/2009$9
Extension of Pell Grants9/30/2011$11