Did Tax Cuts Help Blow the Bubble?

The Times continues to try to lay bare the roots of the housing debacle. Today’s story, part of its excellent “The Reckoning” series, looks at a Clinton-era law that eliminated most capital-gains taxers on home sales. The story is not as strong as the other entries in the series, but it raises an interesting topic.

While the paper is quick to say the tax cut wasn’t the key cause of the crisis, it does make the case for it being a contributor. Here it talks to a homebuilder about how he used it to pitch potential buyers:

Mr. Wampler said he never sold a home simply because of the law’s existence, but it played a role in his decisions and also became part of his stock pitch to potential customers who were considering buying the homes he was building in the desert. He would point out that the tax benefits would increase their returns on a house, relative to stocks.

“Why not put your money on the highest-yielding investment with the highest tax benefit?” he said recently.

During the boom years, he prospered. But today he owns 80 acres of land on the outskirts of Phoenix that he cannot sell. He owes $8 million to his banks, which may soon foreclose on his land.

“I am literally dying on the vine,” he said.

It started as politics, of course, with Clinton worried about a tax-cut proposal from Bob Dole in the campaign of 1996. Why does it not surprise me that Dick Morris was involved?

At the same time, Mr. Clinton’s aides began scrambling to come up with their own tax proposal. Dick Morris, the president’s chief outside political adviser, argued that Mr. Clinton could assure his re-election by matching Mr. Dole’s call for a big cut in the capital-gains tax.

Here’s the anchor of the piece:

Perhaps the most detailed analysis of the provision has been the study by a Federal Reserve economist, Hui Shan, who did the analysis while at M.I.T. Ms. Shan looked at homeowners with significant equity gains, before and after 1997, and compared the likelihood of their selling their house. Her study covered 16 towns around Boston and took into account a host of other factors, like the general rise in home prices at the time.

Among homes that had appreciated less than $500,000, she concluded that the change caused a 17 percent increase in sales in the decade after 1997. Before the law changed, many people apparently avoided paying the tax by simply staying in their homes.

I’m not convinced by the story that this was a huge deal—in part because of its own admission that before the tax cut, the law only brought in a few hundred million a year because it had several large exemptions. But it’s worth bringing up.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.