PHASES The quarterly high-employment budget and the annual percentage increase in M, (cash and demand deposits in commercial banks) and M, (M, and time and savings deposits in commercial banks) was evaluated for the period 1950-75. There are four periods when stabilization policy is assumed to be deflationary. There are four periods when stabilization policy is assumed to be expansionary. Each period is also evaluated on the basis of whether the fiscal-monetary mix was favorable or unfavorable to housing. In periods of deflationary goals, a policy weighted in favor of monetary policy is considered negative to housing, while a policy weighted in favor of fiscal restraint would be favorable even though housing would be expected to suffer in either case. In periods of expansionary objectives a fiscal-monetary mix weighted in favor of monetary stimulus is considered positive to housing and vice versa. In both cases, a wellbalanced policy is considered neutral. Our simple subjective analysis indicates: 1) During deflationary phases stabilization policy is heavily weighted toward the use of monetary policy. Rarely does fiscal policy provide sufficient restraint to balance the policy mix. Thus, during periods when deflationary outcome is desired, the fiscal-monetary mix has tended to be adverse to housing. 2) During expansionary phases of stabilization policy, the fiscal-monetary mix has been both favorable and unfavorable to housing. Jacobe & Thygerson: National Fiscal Policy and Housing 47 3) Over the period covered, the tendency has been to use a relatively heavier weighted monetary policy mix during deflationary phases and heavier weighted fiscal policy mix during expansion phases. This is born out by the fact that the only positive fiscal-monetary mix took place during the mid-1950s and early 1960s. These trends would suggest that housing may have experienced difficulties in recent years as a result of the increased tendency to weigh monetary policy more heavily than fiscal policy during deflationary phases of stabilization policy, and fiscal policy more heavily during expansionary phases. Both tendencies are generally less compatible to a strong housing market and available mortgage credit. HOUSING OUTLAYS Another way the federal government impacts the housing market is with its allocation of expenditures for housing. In this regard, housing must compete with other national priorities for funds. As a result, the amount of federal expenditures for housing does reflect at least to some degree the national priority status of housing." Housing as a national priority fits somewhere in between the foregoing examples. In 1965, federal outlays for housing totaled about one-half billion dollars while by 1974 they were nearly $5 billion-a tenfold increase in nine years. This rate of growth implies that housing has been an increasing national priority over the past decade. This impression is confirmed for the period 1965-1972 as housing outlays increased from 0.4% of total federal outlays to 1.9% and from 0.08% of GNP to 0.4%. However, in 1973 and 1974 federal housing outlays did not meet their 1972 levels representing only 1.75% of total outlays and 0.36% of GNP in 1974. Although housing has been an increasing national priority during the last decade, the trend did not continue upward during 1973-74. More surprising than this reversal of trend, however, is the overall size of federal housing expenditures. Housing outlays representing less than 2% of total federal outlays-less than 0.5% of GNP-can hardly be seen as reflecting a major national priority." Goals In spite of the small size of federal housing outlays, they do hold a significant potential for impacting housing production. Two ways in which the degree of use of this potential can be examined involve housing goals and housing stability. Ideally, the federal government should be capable of adjusting its spending to achieve specified housing production levels which reflect both improved housing for the population and stability in production. In 1969, the nation's housing production goal was set at approximately 26 million new units over the next decade and a production schedule was estab 6. The Budget of the United States Government, Fiscal Year 1976 (Washington, D.C.: U.S. Government Printing Office, 1975), p. 109. 7. Ibid. 48 Real Estate Issues, Fall 1976 lished. This goal was revised to 25.5 million new units and 1.0 million publiclysubsidized, rehabilitated units in 1970. Since then a number of studies have been done estimating our nation's housing needs with estimates ranging from 22 to 29 million new units over 10 years. Attainment of the 1970 production schedule on a cumulative basis was fairly good between fiscal 1969 and 1975. The cumulative target for 1975 was 16.3 million new units while 15.2 million were produced. As of fiscal 1975, the nation has achieved 93% of its target for the period 1969-75. This success, however, has not been achieved in a stable, healthy manner. In fiscal 1971, production was 13% over its target followed by a 25% over-shot in 1972 and 15% over-shot in 1973. Then in 1974 actual production fell 23% below its goal followed by an even more pronounced fall of 55% in fiscal 1975. The sharp declines experienced in fiscal 1974 and 1975 indicate that even with a strong housing recovery in 1976 the nation will be well below its housing goal for the decade. Another way housing production could be expected to be influenced by federal housing outlays is in the form of subsidized new units. In 1965, 48 thousand new subsidized units were produced representing 3.2% of total new unit production in that year. In 1974, these units totaled 45 thousand-only 3.4% of total production. Subsidized housing units represent only a small share of housing production and thus do not have a major impact. Further, the number of subsidized units produced per year does not reflect a federal government attempt to use this source of impact as a method of stabilizing housing production. If these units were being used to aid housing production, they should increase as production falls below target levels and fall when production exceeds the annual goal. This has not been the case as subsidized production averaged 13.5% of total starts during the boom years of 1971-72 but less than 4.0% during the bust years of 1974-75. As a result, the production of subsidized units actually accentuates housing instability. This also tends to be the impact tendency of federal housing outlays as a whole. Between 1969 and 1973 as housing production realized rapid expansion, the ratio of federal housing outlays to total outlays increased fourfold. Then as housing production declined swiftly in 1973-74, this percentage also declined. In conclusion, it is clear that any impact federal housing outlays did have on production acted to exacerbate housing instability. TAX EXPENDITURES Another aspect of government expansion is reflected by federal government tax expenditures. 10 Tax expenditures is the term used to account for those tax 8. Estimates of Housing Needs, 1975-1980, prepared for the Committee on Banking, Housing and Urban Affairs, United States Senate (Washington, D.C.: U.S. Government Printing Office, 1975), pp. 2-4. 9. "Housing Starts," July 1975, Department of Commerce, C20-75-7 (Washington, D.C.: U.S. Government Printing Office, 1975), pp. 4 and 6; and United States League of Savings Asso ciations. 10. Some indication of the widespread use of this mechanism by the federal government is shown by John L. Siegfried, “Effective Average U.S. Corporation Income Tax Rates," National Jacobe & Thygerson: National Fiscal Policy and Housing 49 revenues which the federal government does not collect because income subject to tax is reduced by special provisions, credits, deductions, exclusions, and exemptions." For example, the deductibility of medical expenses is generally accepted as a tax expenditure. 12 Total federal tax expenditures for 1967 were $36.6 billion while by fiscal 1974 they amounted to $72.7 billion. 1. Data for 1967-72 in calendar years and for 1973-74 in fiscal years. SOURCE: U.S. Department of Treasury; Special Analyses, Budget of the United States Government, Fiscal Year 1976, pp. 108,109. This represents a doubling in less than eight years with the result that in 1974 the federal government expended revenues in this form amounting to almost 6% of GNP. Federal tax expenditures and outlays combined accounted for nearly 40% of the nation's total product in 1974.13 Tax Journal 27 (June 1974), pp. 245-259, in his computation of the effective corporation income tax rates for 100 industries in 1963. He found that the average effective tax rate was 39% as opposed to the nominal corporate tax rate for that year of 52%. Further evidence of the use of tax expenditures is noted in Stanley S. Surrey and William F. Hellmuth, "The Tax Expenditure Budget-Response to Professor Bittker," National Tax Journal 22 (December 1969), pp. 528-537; Secretary of the Treasury, U.S. Treasury, "The Tax Expenditure Budget: A Conceptual Analysis," Annual Report of the Secretary of the Treasury 1968 (Washington, D.C.: U.S. Government Printing Office, 1968); B. I. Bittker, "The Tax Expenditure Budget-A Reply to Professors Surrey and Hellmuth," National Tax Journal 22 (December 1969), pp. 538-542; and Barry M. Blechman, Edward M. Gramlich, and Robert W. Hartman, Setting National Priorities: The 1976 Budget (Washington, D.C.: The Brookings Institution, 1975). It is noted in the Brookings publication that tax expenditures for 1976 would sum $91.8 billion $21.0 billion in tax subsidies to the corporate sector (44% of corporate tax revenues) and $70.8 billion for individual households (67% of income tax revenues). 11. Estimates of Federal Tax Expenditures, prepared by the staffs of the Treasury Department and Joint Committee on Internal Revenue Taxation, Committee on Ways and Means, U.S. Congress, June 1, 1973 (Washington, D.C.: U.S. Government Printing Office, 1973), pp. 1-3. 12. Special Analyses, Budget of the United States Government, Fiscal Year 1976 (Washington, D.C.: U.S. Government Printing Office, 1975), p. 108. 13. Economic Report of the President, transmitted to the Congress February 1975 (Washington, D.C.: U.S. Government Printing Office, 1975), pp. 249-328. 50 Real Estate Issues, Fall 1976 Tax Expenditure Mix As federal tax expenditures have increased so has the allocation by function. These allocations, however, have not all increased equally, revealing once again changing national priorities. For example, consider the area of income security. Tax expenditures in this area include such items as the deductibility of medical expenses, the exclusion of sick pay, the exclusion of unemployment benefits, and additional exemption given those over 65. In 1967, tax expenditures in this area were an estimated $15.6 billion or 43% of total tax expenditures. By fiscal 1975, tax expenditures in this area totaled $27.2 billion or 34% of the total-a clearly declining tax expenditure priority. By way of contrast, tax expenditures for state and local government are an increasing priority. This tax expenditure essentially reflects the exclusion of interest on state and local debt and the deductibility of nonbusiness state and local taxes. These expenditures were estimated at $4.6 billion in 1967 and $13.1 billion in fiscal 1975. As a result, state and local tax expenditures increased from 13% of total tax in 1967 to 17% in 1975. Housing Tax Expenditures Another way the federal government impacts the housing market is with its use of federal tax expenditures. Once again, housing must compete with other national priorities. As a result, the success of housing in this competition also reveals in part the national priority status of housing. TABLE 2 HOUSING TAX EXPENDITURES1 Function Bad debt deduction for thrifts Housing rehabilitation with 9-year amortization Excess depreciation on rental housing Deductibility of mortgage interest on owneroccupied homes Deductibility of property taxes on owner-occupied homes Total 1,800 2,350 2,800 2,900 2,700 3,250 4,060 4,660 5,270 4,550 5,460 6,355 6,335 6,010 6,750 10,495 11,915 13,385 1. Data for 1967-1972 in calendar years and for 1973-1976 in fiscal years. Adjustments made to Treasury compilation of what are housing tax expenditures (S&L bad debt deduction included). Less than $1 million. SOURCE: U.S. Department of Treasury; Special Analyses, Budget of the United States Government, Fiscal Year 1976, pp. 108, 109. Jacobe & Thygerson: National Fiscal Policy and Housing 51 |