If you’ve been following the news regarding the foreclosure crisis you’re probably familiar with the settlement between five of the nation’s largest mortgage lenders and 49 state attorneys general. The $25 billion settlement was reached as a means of preventing further litigation against the banks for alleged “illegal” foreclosures. Interestingly enough, the thousands of homeowners expected to receive cash from the settlement will also be subject to income tax on that money. That is, unless Congress manages to get a bill through to the president’s desk within the next couple of months.

According to a news story from Accounting Today Rep. Jim McDermott and two co-sponsors have introduced a bill into the house that would exclude settlement payments from federal income tax. His reasoning is that settlement recipients have been wrongly foreclosed upon and the settlement money is “payback” for wrongs done.

“I applaud the work of the state attorneys general in brokering this settlement to provide needed relief to America’s homeowners and service members,” said a statement from McDermott. “This level of consensus is rare, and speaks volumes to how important this relief is. Now it’s our turn to ensure that every bit of negotiated relief goes to the people who need it the most. Collecting federal income tax on relief intended for struggling homeowners is not only bad policy, but is simply wrong.”

The bill seems like a slam dunk for McDermott and his three co-sponsors. It’s hard to believe in election year any representative or senator would have the nerve to vote down legislation that provides any measure of tax relief. Yet at the same time, in the circus atmosphere that now pervades Washington nothing is impossible.

The Question of Tax Fairness

Whether or not you agree with McDermott’s assessment the potential tax relief bill opens up a further can of worms no one seems to be talking about. That can worms has to do with tax fairness.

In other words, most of the money set aside for distressed homeowner relief by the Obama administration in recent years has never made it into the hands of homeowners. Likewise, this tax relief bill will only affect a small minority of homeowners facing foreclosure. What about those homeowners not receiving any settlement funds? Not only will they not be receiving any direct help, they also won’t be receiving any tax breaks either.

Tax fairness is the principle that all citizens should be treated the same way when it comes to how tax laws are applied. To that end this bill is patently unfair to a vast majority of homeowners who are in financial trouble but not reaping the benefits of the bank settlement. Furthermore, I dare say there won’t be many of the nation’s wealthy homeowners positively affected by either the settlement or the tax relief bill. Therefore, tax fairness is once again left by the wayside for political purposes.

Nothing ever seems to change in Washington, does it?