Cash for Clunkers increases demand and related price for autos that otherwise would not be. Also, increased demand raises home prices above market value and governments are benefiting from the $8,000 credit because it is keeping home prices artificially high. And this punishes EVERY property owner first to subsidize the $8,000 credit and second with higher property taxes.
The Cash for Clunkers and $8,000 Home Purchase Tax Credit are very interesting economic programs. Economics for me boils down to two main forces: supply and demand. When allowed to act freely, supply will balance with demand and set the appropriate price and quantity. However, government influence to increase demand or reduce supply keeps prices higher than the market would. Unfortunately, government programs typically punish those, like the poor, they claim to help, reward the rich and create "bubbles" or short term fixes to long term problems. I mention this because it explains how programs like the $8,000 Home Purchase Tax Credit and Cash for Clunkers programs are conceived. Wouldn't it be great if everyone could have a home or purchase a newer car? But that just isn't reality; people generally get what they earn.
First let's discuss the $8,000 Home Purchase Tax Credit. This credit temporarily benefits a few and punishes the rest. How? An $8,000 tax credit benefits the seller by increasing demand which keeps prices higher than normal because there are more buyers competing for homes. These higher prices result in additional commissions for loan origination, appraisal and realtor fees. Increased home prices are only temporary and will immediately disappear once the credit is discontinued; this is something that the buyer should be aware of. Is this credit something we want to continue forever?
As you peel away the credit, it has two even more devious beneficiaries.
First are the investors who have time to sell their investments or leverage them until the credit is removed. Secondly is local government. Governments are in a desperate situation conjuring many ways to get tax revenue like the unfathomable rise of assessments in Bannock County. As mentioned, increased demand raises home prices above market value and governments are benefiting from the $8,000 credit because it is keeping home prices artificially high. And this punishes EVERY property owner first to subsidize the $8,000 credit and second with higher property taxes. As for the buyer, the $8,000 tax credit will disappear when you reduce it by the additional amount of loan interest, origination fees, drop in home price and related property taxes that the consumer would otherwise not pay.
Cash for Clunkers also increases demand and related price for autos that otherwise would not be. And in many parts of the country, autos are assessed as property and receive property taxes. Like with homes, the artificial increase in price keeps the taxable base higher than it ought to be. One interesting thought on this is that the Cash for Clunkers program affects the supply side by destroying vehicles. The reduction of the supply side will also keep pressure for higher prices. Once this program goes away, the bubble will burst and the price of vehicles will drop.
I used to have a boss who said when someone says "It's not about the money"-it's about the money! I often repeat this when I want to understand something. It is a recurring theme from the left that big business is corrupt and I agree that much of it is. The results of Cash for Clunkers and the $8,000 home purchase credit are that the poor won't have as many older cars or cheaper homes to purchase. How ironic!
Now I refuse to assume that the liberal Democratic Congress is this stupid. They are not! They know what they are doing will benefit big business and big government; and ladies and gentlemen that is the plan. As I have stated before, we have one party with two faces, Democrats and Republicans. On a national level if you vote Republican, they win, and if you vote in Democrats they win. So if you want your republic back then the people need to be objective, aligning their votes with principles and not personalities. If a Republican, like George W. Bush, abandons the Constitution with TARP, the Patriot Act, Iraq War, etc. he must be held accountable and likewise as President Obama continues on the Bush path, he too must be held accountable. Please do not get caught up in the Republican and Democrat bickering. It is meant to deceive and throw you off course. Fortunately this happens more nationally than locally. However, on all levels we need to do a better job of electing public officials who first understand and second honor the U.S. Constitution.
“They know what they are doing will benefit big business and big government…” Actually, these fine-sounding programs are instituted to increase their own power. The fact that other parties might benefit is secondary.
Further, the unintended trickle-down effects of these programs are irrelevant. It sounds so good; tax credits and incentives to buy stuff – going to help the economy, right?
When things go wrong (delayed payments to auto dealerships, shifting the buying habits of consumers to a different point in time, overspending the budgeted amount of the program by a factor of 2.5, etc.), no one holds our legislators accountable.
We keep voting them in year after year because they keep dangling goodies before us. There is no down side for them.
That has to change.
Carl, your theory works part way. Let’s start with the premise of property tax. Municipalities that reappraise every year are a decided minority. So what is the effect on taxes of the rebate? The answer is none. The property tax assessment cycle is driven by average sale prices but the tax rate is driven by the amount to be raised and the total assessed value of all property in the taxing district. Therefore if home values go down and the local amount to be raised does not follow suit guess what the tax rate increases. Large differences in taxes paid on property tend to occur in areas where some properties have appreciated in value significantly since the last assessment. In a revaluation thise properties will end up paying significantly more while that had a average appreciation will pay about the same and those that appreciated at lower than average will potentially pay less. Therefore I do not buy the tie to property taxes paid. On the other hand sales prices are probably inflated but the credit is not going to high ticket properties since it is limited in its use. Overall the only people eventually hurt by the first time buyer credit is the recipient and everyone else that paid for it.
The C4C program is a wonderful economic shell game which shifted demand forward, and had no lasting effect on the economy except for the potential to make repo men a hot occupation. You will notice that show rooms are now empty and volume is down. The interesting thing that I noted was that people doing a C4C program paid basically the same as the deal I negotiated when I returned my leased vehicle. It traded nothing, got no C4C rebate and paid the same net as those in the program. Hmmm no winners on the buying side except that they aren’t bright enough to realize they paid more than they should have. Sellers did OK for 30-45 days but are now back into the doldrums. Net result we see the things taught in economics 101 mess with the demand curve and you may see a pop but then you see the drop typically lower than before.
Now couple all of this with media obsessed with the Omessiah and economically challenged so they still don’t know that both programs are welfare failures and further do not understand why things aren’t getting better. Oh well, there is a lot of welfare that is called other things particularly in higher education where Pell welfare grants are called scholarships.
Hi, Mickey
I appreciate your comments. I know for my area of the country, they do reassess every year and how they do it, is a mystery only they know. It is supposed to approximate market value, but this is why I distinguish it as “assessed” value. The general point is that the federal government is propping up home prices, to the benefit of local government. I think the cleverness is in the formula. Typically if your property value goes down you would likewise expect the tax to go down. However as you imply the budgets are somewhat fixed, so the tax dollar would stay the same while the percentage sky rockets. Thus keeping “assessed” values higher it helps disguise the tax game. I do appreciate your comments. Thank you, Carl
Cash for clunkers cost taxpayers a lot of money for a little return. It also cost auto repair shops and car donation charities much money.
Carl, some day when you have a lot of time I can walk you through the process toe electronically reassess properties. I was a member of the first group to write a commercially available product to handle automatic reassessments. Product works well and provides repeatable results. Limitations are interesting since defining comparables is the key to the reassessment.