Off the Charts Blog | Center on Budget and Policy Priorities

The paper on tax reform options that the Senate Finance Committee issued yesterday includes CBPP’s proposal for a renters’ tax credit to help the poorest families afford housing.  Such a credit would be a valuable complement to the existing Low-Income Housing Tax Credit (LIHTC).

Here’s why.

A renters’ credit would help rebalance the nation’s housing policy, as well as its housing-related tax subsidies.  The federal government spends more than $200 billion annually to help families pay for housing.  But the bulk of that goes for homeownership tax subsidies (like the mortgage interest deduction) that favor higher-income families, most of whom could readily afford homes without assistance.

Meanwhile, growing numbers of low-income people pay very high shares of their income for rent, as the graph shows.  This forces them to divert resources from other basic needs and places them at risk of housing instability or homelessness, which can cause long-term harm to children’s health and educational outcomes.

Sharp cuts to federal rental assistance under the sequestration budget cuts, together with the 2011 Budget Control Act’s tight caps on annual discretionary funding, will leave even more families struggling to afford housing.  A renters’ credit would address some of these pressing needs.

For two reasons, the renters’ credit should complement — not replace — the LIHTC, which policymakers created in the 1986 tax reform law to support the development and renovation of housing affordable to families with incomes roughly double the poverty line.

First, the LIHTC does not by itself typically make housing affordable to the poorest Americans, such as low-wage workers and the lowest-income elderly people and people with disabilities.  The renters’ credit would help these households afford rents in developments subsidized through the LIHTC and in other buildings.

Second, before creating the LIHTC, policymakers had long struggled to establish efficient, accountable subsidies for construction and renovation of affordable housing, an important need in many areas.  The LIHTC has performed well in this role, though it could be made even more effective.

Policymakers should streamline inefficient housing tax expenditures, such as the mortgage interest deduction, to better achieve their goals and generate revenues to contribute to balanced deficit reduction.  They should also use a portion of the savings (after meeting deficit-reduction needs) to address growing hardship among low-income renters by establishing a renters’ credit to complement the LIHTC.

The mortgage interest deduction is one of the largest federal tax expenditures — it costs the federal government about $70 billion a year — yet it appears to do little to achieve the goal of expanding homeownership.  This tax break needs reform, as we explain in a new paper.

The bulk of the deduction’s benefits go to higher-income households who generally could afford a home without assistance:  in 2012, 77 percent of the benefits went to homeowners with incomes above $100,000.  Meanwhile, the deduction provides little benefit to the middle- and lower-income families who are most likely to struggle to afford homeownership (see chart) — and no benefit at all to more than a third of homeowners with mortgages.

Three major bipartisan panels have proposed converting the deduction to a credit and lowering the maximum amount of interest that it covers.  These reforms would be major improvements over current law and would generate significant additional revenue.

• A mortgage interest credit would provide more help than today’s deduction to most middle- and lower-income homeowners with mortgages, while trimming subsidies for upper-income owners.  As a result, it would likely do more than the existing deduction to help families that would otherwise struggle to afford the costs of homeownership.
• Unlike simply eliminating or scaling back the deduction, which some fear would undermine the housing recovery, replacing the deduction with a credit would make a major overall drop in housing prices unlikely.  The credit would replace much of the deduction’s overall dollar value and would subsidize more households to purchase homes than the existing deduction.  Congress could further reduce the risk of market disruption by phasing reforms in gradually.
• The proposed reforms could raise substantial added revenue — about $200 billion over ten years, under one version — and thereby contribute to a balanced deficit-reduction package.  Policymakers could also use part of the savings (once deficit-reduction goals have been met) to address a portion of the large unmet need for assistance among renters at the lower end of the income scale.  For example, the new renters’ tax credit that CBPP has proposed, if capped at $5 billion per year, would substantially reduce housing cost burdens and the risk of homelessness and other serious hardship for 1.2 million low-income renter households.

Click here to read the full paper.

The Bipartisan Policy Center’s (BPC) Housing Commission called this week for expanding federal rental assistance to help all of the lowest-income households who need it.  We agree, because there’s more need for assistance than ever.

The number of unassisted renters who earned less than 50 percent of median income and paid more than half of their income for housing or lived in severely substandard homes rose to 8.5 million households in 2011 — a 43 percent jump since 2007 — the U.S. Department of Housing and Urban Development (HUD) has reported (see chart).  Funding limitations keep most eligible families from receiving rental assistance.

The BPC commission’s main rental assistance proposal would more than double the number of families receiving assistance through the Section 8 housing voucher program.  New vouchers would go to the neediest families, with the goals of ending waiting lists for housing assistance for poor families and sharply reducing homelessness.

Vouchers are the nation’s most effective form of rental assistance, and the program merits expansion.  But the 2011 Budget Control Act’s tight ten-year discretionary spending limit will make it unlikely that Congress will fund more vouchers in the near term.  Indeed, as we’ve noted, the automatic budget cuts (“sequestration”) scheduled for this Friday would likely mean more than 100,000 fewer vouchers in use.

A new federal tax credit also could help more low-income renters afford housing, as we’ve proposed and the BPC commission highlights.  The commission’s report notes that the credit “could help increase the ability of low-income households to pay prevailing rents in high-opportunity neighborhoods, as well as help stimulate production and preservation of affordable rental housing for low-income households and reduce homelessness.”  A renters’ credit could be funded using a portion of the savings from scaling back tax subsidies for higher-income homeowners.  We estimate that $5 billion in annual credits could ease rent burdens substantially for 1.2 million low-income families.

As the BPC report points out, families paying very high shares of their income for rent and utilities “often have insufficient income available to meet their basic needs for food, health care, education, and transportation — undermining child and adult health and contributing to residential instability that can, among other things, impair educational achievement and employment potential.”  Making housing more affordable for those families should be a top priority of the nation’s housing policy.

The number of low-income families struggling to afford housing has grown dramatically in recent years, according to CBPP analysis of new Department of Housing and Urban Development (HUD) data.  That’s one reason why so many poor children live in households that face major hardships such as falling behind on the rent or mortgage, as my colleague Arloc Sherman recently noted.

About 8.5 million households with very low incomes faced “worst case housing needs” last year, meaning that they had no housing assistance and either paid more than half of their income for rent and utilities or lived in severely substandard housing.  That’s 2.6 million (43 percent) more households than in 2007.

Families that pay large shares of their income for rent are much more likely to move frequently or go through periods of homelessness — experiences that can seriously harm children’s health and development.

Many more families would face severe housing problems without federal rental assistance programs like “Section 8” vouchers and public housing, which help close to 5 million households afford decent housing.  But, due to funding limitations, rental assistance has expanded only modestly as needs have grown (see graph), and families in much of the country face long waiting lists.  If policymakers cut rental assistance programs as part of a major budget deal, even more families could face unaffordably high rents.

To stem and ultimately begin to reverse the growth in severe housing needs, policymakers should:

• Avoid cutting non-defense discretionary funding even more than they already have. Policymakers last year cut non-defense discretionary spending — the budget category that includes rental assistance — by about $900 billion over the coming decade, mainly by imposing spending caps in the Budget Control Act.  Policymakers have already cut housing assistance funding by $2.5 billion (6 percent) below 2010 levels and will have to squeeze funding for a range of programs — likely including housing assistance — to meet the caps in future years.  Further cuts would heighten the risk of major cuts in rental assistance.
• Streamline rental assistance programs. Congress could stretch limited funding further by making rental assistance more efficient.  One promising bill, the Affordable Housing and Self-Sufficiency Improvement Act (AHSSIA), contains well-crafted, broadly supported reforms that would protect low-income families while saving $2.8 billion over five years, according to the Congressional Budget Office.     
• Rebalance housing-related tax policies to help low-income renters. The bulk of federal spending on housing goes to tax subsidies for homeowners, which mainly benefit higher-income families.  The deductions for mortgage interest and property taxes will cost more than $100 billion in 2012, or about twice as much as all federal low-income housing programs combined.  Congress should reform homeownership tax breaks and direct some of the savings to a renters’ tax credit that would ease hardship for families at the bottom of the income scale.

A recent New York Times op-ed explains that the nation’s housing policy focuses too much on tax subsidies for homeownership — which mainly benefit the wealthy — and too little on helping struggling and moderate-income families afford decent housing.  We agree, and we’ve recommended rebalancing federal housing policy by creating a tax credit to help low-income families afford their rent.

More than three-fourths of homeownership tax subsidies go to households with incomes above $100,000, based on the best available data.  The op-ed says more than half, citing our paper, but that figure covers spending for programs like housing vouchers as well as tax subsidies.

Homeownership tax subsidies comprise the bulk of overall federal housing spending.  At more than $100 billion in 2012, the deductions for mortgage interest and property taxes cost about twice as much as all federal low-income housing programs combined.  The homeownership subsidies are so large and tilted toward the top that families with incomes above $200,000 get about four times as much federal housing assistance as those with incomes below $20,000, on average (see graph).

Are these the right priorities?  As we’ve pointed out, housing needs among low-income households, especially families with children, have grown sharply over the past decade.  More than 7 million low-income families who receive no federal housing assistance pay more than half of their income for rent and utilities.

Such rent burdens force families to shift resources away from other basic needs like food, medicine, and clothing for school or work, and place them at greater risk of housing instability and homelessness — problems that do serious harm to children’s long-term health and development.

There’s growing talk of reforming the homeownership tax deductions in ways that would make them more efficient and help reduce the deficit.  Policymakers could also use a modest share of the savings to fund measures that address unmet needs at the bottom of the income scale, such as the National Housing Trust Fund to develop housing for poor families (as the op-ed suggests) and our proposed renters’ credit, which could be used in conjunction with the trust fund.

As we outlined here, a renters’ credit capped at $5 billion a year could:

• Assist about 1.2 million of the lowest-income renter households;

• Reduce each household’s rent by an average of $400;

• Cut the number of very low-income households paying more than half of their income for housing by about 700,000; and

• Lift 250,000 families out of poverty and lift four of five of the poorest families it assists out of deep poverty (defined as having income below half of the federal poverty line).