Sen. Johnny Isakson wants Congress to spend $16+ billion for a tax credit for new homeowners, something he has been pushing for awhile now, which would be coupled with additional benefits for the unemployed:

Weighing in at $16.7 billion, the homebuyer tax credit being pushed by Sens. Johnny Isakson (R-Ga.) and Chris Dodd (D-Conn.) makes up the bulk of that total. The Joint Committee on Taxation released that estimated price tag Tuesday.

Isakson and Dodd plan to offer their housing tax credit extension as an amendment to legislation extending jobless benefits. The jobless benefits – the second bit of stimulus the Senate is likely to approve – would cost about $2.4 billion according to a preliminary estimate by the Congressional Budget Office. The cost of the extended jobless benefits would be offset by extending the federal unemployment tax on employers through June 30, 2011.

The primary response of Republicans in Washington has been to offer tax credits and other incentives to replace the drop in demand for housing. Witness Senator Johnny Isakson’s recent comments on why we need to extend the $8,000 homebuyer tax credit: “If you take that kind of business out of what’s already a very weak housing market, you do nothing but protract and extend the recession.”

This analysis could not be more wrong. The tax credit largely acts to keep housing prices from falling further. However, that is how markets are supposed to clear in an environment of excess supply. If there’s too much housing, the way to address that is to allow housing prices to fall, which attracts buyers back into the market.

We should also recognize that the tax credit does not help the buyer, it helps the seller, by allowing the seller to charge that much more for the price of the home.

Perhaps the worst impact of the policy is that it encourages the continued building of homes, only adding to the over-supply, which itself will “protract and extend the recession.”