A new proposal from Berkeley’s Terner Center aims to broaden favorable tax treatment for housing to include the nation’s renters
Our tax code is highly skewed towards homeownership. Between the deductions for mortgage interest expenses and property taxes, the exclusion of capital gains on sales of homes, and the non-taxation of the imputed rent of owner-occupied homes, the federal government spends the equivalent of about $250 billion per year supporting home ownership.
As a result of these policies, and others (federal guarantees and subsidies for home mortgages, and local land use policies) home-ownership has become our de facto wealth creation strategy in the United States. If you’re a renter, there are virtually no equivalent benefits in the tax code: there’s nothing that helps you reduce your housing costs or build your wealth.
A new proposal from the Terner Center for Housing and Innovation at the University of California, Berkeley, would establish tax benefits for renters. The idea is basically to create an analogue of the existing Earned Income Tax Credit–was favors low income working families–for lower income renters. Called the FAIR credit–“Federal Assistance in Rental Credit”–it would give low income households with high housing costs a federal subsidy averaging between $200 and $400 monthly, depending on the variant of their proposal and local market conditions.
What the Terner Center is proposing is a much more fully fleshed out version of an idea we sketched out at City Observatory earlier this year, “Why not make housing assistance to the low income as easy as assistance to the high income?” Current housing assistance programs reach only a little over one-in-five eligible households, and require an arduous and often lengthy approval process–a sharp contrast to the automatic and nearly effortless provision of tax benefits to homeowners.
The concept of using the tax code to deliver financial assistance to renters –something we’ve done for decades for homeowners—has been kicking around in policy circles as a provocative, but underdeveloped idea. Kudos to the Terner Center for transforming this rough idea into a practical policy proposal. Their white paper examines different ways to calculate and deliver the FAIR Credit, with varying levels of benefits and eligibility. The program would be targeted at renters who earn less than 80 percent of the local median income, and who pay more than 30 percent of their income toward housing costs.
The FAIR tax credit proposal comes in three flavors. The most ambitious is the “rental affordability” plan: it would basically give all households with incomes of less than 80 percent of the median a tax credit equal to the difference between 30 percent of their household income and the lesser of the actual rent they paid or the small area fair market rent for their neighborhood. This version would cost about $76 billion annually, but would dramatically reduce the affordability problems of 13.3 million households. The average participant would get assistance of about $474 per month.
A more limited—and economical—alternative is the “rent reduction” plan, which would give households a sliding credit of between 12 and 25 percent of their rental payments, again with the maximum tied to the lower of their actual rent or the small area fair market rent for their neighborhood. This plan would provide less relief—average benefits would be about $227 per household, but the aggregate cost to the Treasury would be about $41 billion annually.
A third alternative combines the two approaches, providing more generous voucher-like benefits for the 3 million lowest income households, and a variant of the rent reduction plan for all other eligible households. It would cost about $43 billion per year and reach 15.3 million households.
Making a tax credit for renters work
The analysts at the Terner Center have anticipated many of the practical challenges of implementing the rental tax credit. While in many respects it could work in a fashion very similar to the existing Earned Income Tax Credit, the rental credit poses some additional issues. The basis for calculating income eligibility for the credit would probably have to be broader, incorporating non-wage income and some cash benefits. And because—unlike with wages—there isn’t a well-audited set of data on rents and housing, some additional information collection and verification would be required to preclude fraudulent claims.
The report also proposes tying rental tax credits both to household income levels and to small area fair market rents. They are also suggesting that the credit be distributed monthly or quarterly, rather than annually, so that it better eases the financial stress of low income households. Alternatively, households that receive the credit might be given the option of receiving some or all of it in the form of a contribution to a tax-advantaged individual development account, as a way of encouraging savings.
The report maps out out several ways that the FAIR credit might be phased in, both as a means of limiting its cost, managing the program’s complexity and minimizing its side effects. For example, benefits might initially be restricted to families with children or the tax credit could be figured at a lower initial rate, or eligibility could initially go only to those with the lowest levels of income.
As critical as it is to provide additional resources, its important to recognize that by itself, a renter tax credit won’t solve housing affordability problems. Indeed, in some markets with high demand and a constrained housing supply, providing additional subsidies for low income households may drive up rents–offsetting some of the economic and affordability benefit from the program. The authors of the Terner Center are aware of this challenge, and point to a 35 year old study of the experimental housing voucher program, which found little effect on prices. But it seems likely that a multi-billion dollar program that reaches millions of households would be a significant increment to demand that it would be expected to put upward pressure on rents. In theory, more purchasing power and higher rents should trigger additional construction, and ameliorate the price effect, but this will take time. It may make sense to phase-in the implementation of such a program, and it will still be critical to work to reduce the barriers to new housing construction.
As difficult as it has become to imagine bold national action on any policy because of the partisan gridlock in Washington, we’ve clearly reached the limits of what local governments can do financially address housing affordability. Even generous bond-funded housing affordability programs, like those in San Francisco and Portland, produce too few units to measurably reduce affordability. And some well-intended local policies, like inclusionary zoning, may actually make affordability worse by limiting new housing construction. And many local governments simply opt out of dealing with affordability, by zoning little or no land for multi-family development, or blocking or simply not seeking funds to build affordable housing.