Robbing Peter to Pay Paul-The Temporary Payroll Tax Cut Contiuation Act of 2011 and Its Effect on the Housing Market
First off, the title of this piece of legislation alone is enough to drive people away from reading it. And I am not sure how many people have actually sat a read a bill of congress….wow. No wonder they can’t get anything done, they are too busy thinking of new ways to bore people. Yet, I digress.
As the title of the post states, when you get down to the meat and potatoes of the legislative Act, you see the inner workings of how things are paid for in this country. What side of the fence you end up on with whether you agree with this bill is simply a matter of whether you are Paul or Peter in said scenario.
And now, re-reading my own title to this blog post, I want to fall asleep. Keeping that in mind, I will try to be brief and somewhat humorous. The basic premise of the “Act” is to temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This will have no effect on an individuals future Social Security income (if there is a Social Security in 25 years) but it does provide a temporary relief and allowing employees to keep more of their earned income in their pocket.
And lest we let those rich people off with more breaks, the “Act” does not extend the break to any individual who makes $18,350 or more during the two-month period of 2012. According to the IRS Press Release:
Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).
Where this “Act” starts to effect the real estate industry is when Congress develops their plan to continue paying for all of their other entitlement programs such as Medicare, unemployment benefits and of course Social Security. Remember, the bottom line of individuals Social Security benefits will not change, but there will be a reduction by 2% per person paying into the Social Security coffers. Also, if there is 2% less taxes going into the treasury, where is the shortfall going to come from to pay for certain entitlements? Well, lucky for us (me, since I read the bill) they put a solution in there. In Section IV of the bill it states that mortgage lenders will need to implement an initial 10-point increase in guarantee fees (g-fees)on Fannie Mae, Freddie Mac, and FHA mortgages to cover the legislation’s costs. That 2-month extension will costing new homebuyers approximately $4000 – $5400 over 30 years on a $200,000 loan, or $11 to $15 monthly.
Copy of the bill here. A little light reading.
A stable housing market is fundamental to the recovery of our economy. We are starting to see a little increase in new homebuyers and refinances are also growing due to the great interest rates. However, adding a defacto tax increase to those of the nation who are trying to buy homes for the first time and inject some confidence into the economy will only push them back to the sidelines.
The middle class is both Peter and Paul in this scenario. A lot of people in the middle class can use that 2% payroll tax cut, but not at the expense of higher costs of homeownership. Surely there are better ways to pay for Congress’ attempts to finance the massive entitlements we currently have.