By Lauren Jessop | The Center Square contributor
(The Center Square) – Pennsylvania lawmakers say creating a tax-advantaged savings plan could boost the state’s shrinking pool of first-time homebuyers.
Those looking to purchase their first home are facing a market impacted by mortgage rates that have doubled since 2021 and historically low inventory.
The sponsors of House Bill 126 hope the creation of First-time Homebuyer Savings Accounts, or FHSAs, will remove some of these barriers.
There are currently a handful of states that offer FHSAs, and the rules vary. Pennsylvania’s bill would allow annual contributions capped at $5,000 for individuals and $10,000 for joint filers, with a maximum total contribution of $150,000. The contributions would be deducted from the owner’s taxable income during the tax year the contribution is made.
The deduction may not be claimed for more than a decade and is limited to an aggregate amount of principle and earnings, not to exceed $50,000 within 10 years.
Rep. Ryan Bizzarro, D-Erie, the prime sponsor of the bill, said in a statement that the program is estimated to boost annual home sales by 4,000, boosting the state’s economy between $7.8 million and $68.8 million.
“Home ownership strengthens communities and provides stability for families,” Bizzarro said. “A first-time homebuyer’s saving account can be a tool in helping people overcome financial obstacles to home ownership.”
According to a report by the National Association of Realtors, existing home sales increased nationally by 14.5% in February after a year of decline. However, year over year, they are down 22.6%. First-time homebuyers are responsible for 26% of purchases – down from last year’s 34% – the lowest share since they began collecting data.
Jeff Ostrowski, an analyst for Bankrate, told The Center Square the initiative seems well intentioned, but he questions how many first-time buyers – who in many cases are struggling to grasp the details of the home buying process – are going to take the time to set up one of these accounts knowing they will max out at $150 per year.
He explained, the proposal limits contributions to $5,000 per year, and based on the state’s tax rate of 3.7%, the savings would only be $150.
Ostrowski noted that other tax advantaged plans yield higher benefits. For instance, he said, if you throw five grand into a 529 education or 401(k) plan, and you’re in the 25% tax bracket, you would save $1,250 a year in federal income taxes.
He also said that although it is a difficult time for first-time buyers right now, Pennsylvania is a “pretty affordable” housing market compared to places like California, Colorado, New York, Washington or Massachusetts.
Regarding the proposed plan, Ostrowski said tax deductibility is a common way to encourage people to save for societally-beneficial goals, such as IRAs and 401(k) plans that allow retirement savers to avoid paying federal income tax on the money that goes into them.
“This is similar, but with the twist that the money would be sheltered only from state income tax,” he said. “The ability of a couple to save $10,000 makes this a little more attractive – instead of the savings of $153.50 on $5,000, the savings would increase to $307. Still not a lot, but a bit more worth the effort.”