What are the Costs of the Payroll Tax Cut?

by Chicago Agent

Do the costs stack up too high for the latest payroll tax cut, or do the savings justify the cost?

The payroll tax cut drama continued earlier today when Speaker of the House John Boehner announced that the House of Representatives would not pass the two-month extension approved by the Senate over the weekend.

The divergence in congressional behavior is being pegged as just the latest in dysfunctional Washington behavior, but a Washington Post blog points out that the tax extension, in its current form, could bring some additional costs to homeowners.

As we reported last week, the Senate form of the extension would primarily fund the billions in lost payroll tax revenue by raising insurance fees on Fannie Mae and Freddie Mac loans by 0.1 percentage points, which would generate revenues in the upper $30 billions (estimates range from $36 to $38 billion). Additionally, the National Mortgage News reported earlier today that a Ginnie Mae rate hike may also be in the cards.

Initially, housing professionals and advocates criticized the fee hike for the pressure it would place on the private loan market, arguing that the higher fees would force lenders to raise their interest rates and further restrict home financing. That, in turn, would drive even more prospective homeowners to FHA financing, a development many analysts and government officials have spoken out against (Update: National Mortgage News reported later today that the Senate has also approved an increase of FHA premiums.)

But now, mathematics are being applied to the fee hike. A recent Associated Press story concluded that for a typical mortgage of $200,000, a homeowner would pay $17 of additional fees per month (that’s $204 a year) beginning January 1, should the measure go into law.

As the Washington Post argues, though, a comparison of costs and benefits would have to be conducted to truly analyze the fee hike’s effects – and that is where the length of the tax cut comes into play.

If the tax cut were to be extended for a year – as House Republicans want – the average American household could save an average of $1000, according to The Post, even with the fees that AP writes about. If the cut only lasts for two months, though – as the Senate bill stipulates – that $204 in additional fees would stack up to $163 in possible savings, not counting all the aforementioned costs to the housing market itself.

So would the tax cut, in either form, be worth it, from your point of view?

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