deficit

A month and a half after the S&P downgrade, it’s easy to forget the political turmoil that captured the nations attention. In this story, Justin Walker of Rainbow Housing Assistance Corporation, reminds us of the very real consequences of political brinksmanship, an apt reminder as the super committee begins to deliberate and as we continue our investigation of congresses continued attempts to deal with the country’s debt:

On the evening of Friday August 5, long after the markets had closed, the news wires were just starting to come alive. Smart phones and computer screens alike all flashed the breaking news that the credit rating agency Standard & Poor’s has stripped the United States of its top-tier AAA credit rating. The move came just days after President Obama signed into law the Budget Control Act of 2011, a down-to-the-wire deal passed by Congress that allowed the Treasury to immediately take on more debt to pay its bills. No one is entirely sure what would have happened if Congress had not passed the bill and the U.S. was forced to default, but everyone was in agreement that they would rather not find out.

On Saturday the 6th, the Treasury immediately fired back with an entry in their blog entitled Just the Facts: S&P’s $2 Trillion Mistake, but the damage had already been done. Sunday evening trepidation about what lie ahead was widespread and the global stock markets did not disappoint. The week of August 8th saw some historic, stomach-turning swings up and down, each day painting a different picture about the downgrade’s impact. Though still a few months off from the legislation’s initial cut of $44 billion in fiscal year 2012, pundits and economists are already tossing around phrases such as “double-dip recession” and “economic slowdown”. But for many Americans, the recovery was not impactful enough to consider this anything other than an extension of an era, a bad situation getting worse, if you will.

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And so it begins… Standard and Poor’s began downgrading municipal bonds this week, a move that comes as no surprise after their recent downgrading of the federal government. Here is a short summary of some the bonds and funds downgraded:

At press time, Standard & Poor’s had already downgraded five industrial development bond issues that had been defeased with Treasuries. The downgrades would affect investors holding those bonds until they can be called and retired, market participants said.

The rating agency also downgraded the Los Angeles Treasurer’s General Pool Fund, the Anaheim, Calif., Treasurer’s Investment Pool Fund, and Broward County, Fla.’s Investment Portfolio Fund — all of which held Treasuries. Bonds backed by federal leases also were downgraded, including those of Miami, Tacoma, Wash., and the Atlanta Downtown Development Authority.

Read the full story here: S&P Begins Dropping a Broad Range of Muni Bonds

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On monday, Sen. Tom Coburn, R-Okla. released a plan (Back in Black: A Deficit Reduction Plan) to reduce the deficit by $9 trillion over the next 10 years. The plan, which both the Senator and Washington insiders see as largely symbolic, contains the following section on the Low Income Housing Tax Credit Program:

As one of the purest examples of a direct spending assistance program run through the tax code, the Low Income Housing Tax Credit (LIHTC) provides more than $5 billion annually in tax credits for the development of affordable housing. Recipients of the credit often sell the credit to investors who in turn develop housing for upper low-income tenants. Over a period of ten years, the nonrefundable credit compensates companies for roughly 70 percent of their investment, and this reimbursement can reach nearly 90 percent of the private companies‘ costs.

Using the tax code to promote affordable housing is both inefficient and duplicative of countless programs at the Department of Housing and Urban Development, which provides other forms of federal assistance to help those in need of housing. As a tax credit, the money is funneled first to the companies taking advantage of the tax break, and much of the federal funds are lost to administrative costs and payouts to private companies instead of applied directly to the housing projects. An audit by the state of Missouri, which provides an additional state tax credit with the LIHTC, found that ―For every $1 in LIHTC authorized and issued, the current tax credit model provides only about $.35 towards the development of housing. The remaining $.65 goes to investors, syndication firms, and to the federal government in the form of increased taxes resulting from the use of state tax credits.

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A recently published compendium of deficit reducing measures published by the Congressional Budget Office shows that eliminating the Mortgage Interest Deduction (MID) would increase revenue by $13.6 billion between 2012 and 2016 and by $214.6 billion between 2012 and 2021:

The tax code treats investments in owner-occupied hous- ing more favorably than it does other investments. For example, the owner of a rental house can deduct various expenses, such as mortgage interest, property taxes, depreciation, and maintenance, but has to pay taxes on the rental income—net of those expenses—and on any capital gain when the house is sold. In contrast, home- owners can deduct mortgage interest and property taxes from their income when they compute their income tax liability, even though they do not have to pay tax on the net rental value of their home….

This option would phase out the mortgage interest deduction, beginning in 2014. By that time, the Congressional Budget Office forecasts, foreclosures will have subsided, construction will have returned to normal levels, and housing prices will have begun to recover. The option would reduce the maximum mort- gage eligible for the interest deduction from $1.1 million in 2013 to zero in 2024 in annual increments of $100,000. That change would boost revenues by only $14 billion from 2012 through 2016 but by $215 billion through 2021 and by increasing amounts relative to the size of the economy through 2024.

The report also recommends lowering the conforming loan limits for Fannie Mae and Freddie Mac and raising their credit guarantee fees.

Read more on the story here: CBO Suggests Housing Program Cuts to Reduce Federal Budget Deficit

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