Today’s editorial lambasting the Biden administration’s calls for tax credits related to housing is spot-on. There’s just one thing I’d like to add: It would probably be one of those “tax cuts for the rich” that Biden likes to say he abhors.
A tax credit reduces your tax liability by directly reducing the number of dollars you owe. For example, if you find that you owe the government $5,000, receiving a $1,000 tax credit would mean you owe only $4,000.
Biden is proposing two separate tax credits. One is a “mortgage relief” tax credit of $5,000 per year for two years. Another is a $10,000 tax credit for people who sell “starter homes.”
Those are relatively large tax credits. For comparison, the child tax credit is only $2,000. A $10,000 tax credit is huge.
The only people who would be able to claim anywhere near the full value of a $10,000 tax credit would be on the wealthier end of the spectrum. Most people do not owe $10,000 in taxes to begin with.
According to the most recent IRS data (from 2021), the average taxpayer paid $14,279 in individual income tax, but that average is highly skewed because the tax system is so progressive. The average taxpayer in the bottom 50 percent of the income distribution paid an average of just $667. And that is an overestimate because it does not include refundable tax credits, such as the child tax credit (up to $1,400) and the earned-income tax credit. Most people in the bottom half of the income distribution end up making money after filing their taxes.
Neither the White House fact sheet nor the page from Biden’s budget document announcing the policy says the housing tax credits will be refundable. A non-refundable tax credit for someone who does not owe taxes is completely useless, and a $10,000 non-refundable tax credit for someone who owes only $500 is 95 percent useless.
If Biden intends the tax cut to be refundable, that’s arguably crazier, since it would amount to sending most beneficiaries thousands of dollars just because they happen to buy or sell a home in the next two years. That’s a strange thing to reward with tax policy, and as our editorial today points out, it still wouldn’t be a good deal.
Now, a $10,000 tax credit for someone who owes $20,000 is nice. But someone who owes $20,000 is already well above the median income and probably shouldn’t be the target of a tax credit. The administration stipulates that these credits would be for the “middle class,” but CBS News reports eligibility would be limited to households with incomes below $200,000.
Considering that median household income in the U.S. is around $75,000, $200,000 is a crazy-high cutoff for the “middle class.” But the cutoff likely has to be that high for anyone to even be able to claim the full value of a $10,000 tax credit. The actual middle of the income distribution doesn’t owe anywhere near that much in taxes. Any non-refundable $10,000 tax credit, for any purpose, will by definition be a tax cut for the rich, and the richer you are, the bigger the cut.