Tax credits boost regeneration markets
Fannie Mae Foundation scholar and AHI affiliate Dr. Zhong Yi Tong — congratulations, Zhong Yi! — has released his landmark study, Washington DC’s First-Time Home Buyer Tax Credit (Adobe; read the executive summary and press release; Adobe) on the economic effects of the Washington DC first-time home buyer tax credits. Although the DC home buyer credit is itself small, its policy significance — as proof-of-concept of several critical elements of tax credits as one of the four kinds of money — is substantial. As the Washington Post reports:
The District’s tax credit for first-time home buyers has been a significant force in jump-starting the city’s real estate market and helping low- and moderate-income people buy their first homes, according to a study released yesterday by the Fannie Mae Foundation.
The statistics (cited below) are compelling – practically irrefutable:
77% of all home buyers used it.
67% first-time homebuyer participation, half again above national averages.
67% of users were low income.
$1.40 in value created per $1 of tax credit (yep!)
This is tremendously significant because though Washington DC is our nation’s capital, its weaker neighborhoods (Northeast and Southeast, including Anacostia) …
Northwest is where the money is …
He bought a home in Anacostia
have long suffered seemingly intractable problems of urban decay and failure to invest.
The DC credit: how it works
Very straightforwardly: individuals claim the credit, which is capped at $5,000 per couple (or unmarried individual), if they meet three tests:
- Bought a primary residence in the
- New owner. Did not own a home in DC in the year before buying.
- Moderate income or below. Income of less than $90,000 (single) or $130,000 (married filing joint). Yes, that’s moderate income in
The DC credit: taxonomically
In terms of the taxonomic dimensions of tax credits, the DC homeownership credit has these features:
- Sponsor-targeted: the home buyer herself can use it. The Low Income Housing Tax Credit (LIHTC) is investor-targeted: normally sold by the sponsor for cash. Investor-targeted credits bring in market compliance/ enforcement discipline but at the cost of some cash-to-credit discount (capital for the venture is less than credits eventually paid over).
- As-of-right: all properties meeting stipulated conditions inure to the credit. In this it is like the historic tax credit, and unlike the LIHTC, which is allocated and capitated (awarded by an intermediary, and limited to a fixed total amount specified by statute).
- Geographically targeted: it applies only to
- Tenure-defined: it attaches to customers who buy their first home, rather than being property-defined (specific to certain enumerated sites). This has the advantage that it is less likely to push up prices of candidate properties, since the credit is ‘awarded’ by the buyer’s decision, and thus is not transparent to the seller.
What it’s done: the statistical impact
Tracing effectiveness is complicated because markets are interdependent and participant behavior is dynamic. Here, because the geography is small enough to be studied, the effects can be quantified, and they are compelling:
- It changed market behavior. Over the program’s first years (1997-2001), 21,821 households claimed the credit. They accounted for 77% of all home purchases in
- It stimulated first-time homeownership. First-time home buyers represented 67% of DC buyers, 27 points higher than the 40% national average.
- It helped low-income people. Although the income caps were moderate, actual customers clustered in the lower-income bands (see striking graphs on pages 13-14 of the report itself), with two-thirds of customers in the range of $30,000 to $75,000 of income.
- It helped reverse population flight. “The homeownership tax credit helped attract suburban residents to the city, reversing a population exodus of the past few decades.”
- It jump-started broader appreciation. DC house prices rose annually 4.9% a year faster than abutting suburbs. “The 4.9% edge … was attributable mainly, although not exclusively, to the program.” (Page 3)
What it means: cost-effectiveness
Doubting-Thomas policy makers have long questioned the value of tax credits, like other forms of fiscal intervention.
“I’m from GAO and I question the impact.”
It is an article of faith among economists, who have the righteous dogma of the dedicated atheist, that fiscal stimuli must have economic entropy, they must be worth less than the government’s net cost. Dr. Tong’s research refutes that notion:
The impact of the District’s first-time homeownership credit was so substantial that it contradicts a commonly accepted theory of public economics, which holds that the actual value of a government subsidy can be no higher than the cost of the subsidy itself. (In other words, a one-dollar subsidy will produce no more than one dollar in value for the recipient.) … But in the District, the tax credit accounts for as much as a 4.9% annual house price rise, which is equivalent to roughly $7,000 in home equity growth per year per home. … Each tax credit dollar produced, during each year covered by this study, roughly $1.40.
In short:
Wow.
What it means: political and policy effectiveness
Back to the Post …
Michael Hodge, chief operating officer in the office of the deputy mayor for economic development, said the report’s conclusions “overall are quite positive” and described the tax credit as a “very powerful tool” in combination with city programs that offer financing assistance. He said the report shows that the tax credit “hit the right population.”
The study, by Zhong Yi Tong, said 21,821 households claimed the tax credit for 1997 to 2001. Hodge said he believes the figure has doubled since then, indicating that it still serves a need. He said that Mayor Anthony A. Williams (D) will seek to have the credit extended through the end of 2009; it now is scheduled to expire next year.
The DC tax credit is a stimulus to urban regeneration. Let’s hope that Congress — which lives in the
