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.

For low-income families that need affordable rental housing, the news from Washington in recent years has been bleak.  Yet, while President Obama’s new budget has shortcomings, it achieves the important goal of holding the ground on housing assistance in a very difficult budget environment.

For starters, the President and Congress agreed to deep cuts in federal housing assistance and community development programs in 2011 and 2012, and sequestration will slash more than another $2 billion from these programs this year.  Because of sequestration, the Housing Choice Voucher program alone will assist as many as 140,000 fewer low-income families by early 2014, we estimate, exacerbating homelessness even as funding for homelessness prevention and re-housing homeless families also shrinks.  This represents the largest shortfall in the program’s nearly 40-year history (see chart).

The cuts come at a time when the number of low-income families that need housing assistance has been rising substantially, there are long waiting lists for rental assistance in almost every community, and homelessness remains a persistent problem.

While sequestration is broadly unpopular, cancelling it will require the President and Congress to agree on deficit-reduction measures with which to replace it — an option that carries risks for safety net programs such as Medicaid and food stamps.

Meanwhile, President Obama has released his 2014 budget.  The budget achieves the important goal of holding the ground on housing assistance and other safety net programs in this strained budget environment.  It does this in three ways:

1. It would replace sequestration with a more balanced package of revenue increases and spending cuts that largely protects safety net programs. An approach that relies solely on cuts would devastate housing assistance over time.
2. It would prioritize low-income programs, including housing, for scarce discretionary resources. The President would increase funding for Housing and Urban Development (HUD) programs by $4.3 billion, or 10 percent, above the pre-sequestration funding levels of 2012, and his proposal also prioritizes rental assistance renewals and homeless assistance — areas that have the most significant and immediate impact on low-income families.
3. It would adopt program reforms that reduce HUD program costs without harming low-income families. The President’s budget proposes important reforms to streamline rental assistance programs, while largely protecting low-income households.  Such reforms are essential to stretching HUD dollars further over the next decade.  The budget also funds initiatives that could help to preserve and improve a substantial share of the public housing stock.

While the President’s budget is a vast improvement over the status quo of the sequester (and the House budget resolution), it falls short in some areas.  Notably, it appears to lock in the deep cuts already made in programs such as HOME (a block grant that supports rental housing and homeownership), and its deficit-reduction package would cut another $100 billion from non-defense discretionary programs, including housing, over the next decade.

And, it offers little to meet the enormous challenge of helping the millions of unassisted families with “worst-case” housing needs.  To meet this challenge, we must look for opportunities that lie outside the traditional box of discretionary housing programs, such as reforming the tax code — including the host of special tax breaks called “tax expenditures” — as well as restructuring Fannie Mae and Freddie Mac and, more broadly, federal housing finance.

For instance, as policymakers consider reforming tax expenditures, it makes sense to pursue a renters’ credit.  If capped at $5 billion, such a credit could reduce rents by an average of $400 per month for 1.2 million of the lowest-income renter households, lifting four of five of the poorest families it assists out of deep poverty.

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 sequestration budget cuts will likely force state and local housing agencies to cut the number of low-income families using Housing Choice Vouchers to afford housing by roughly 140,000 by early 2014, as we explain in a new paper.  This represents a sharp break from Congress’ bipartisan commitment — which it has met for most of the voucher program’s nearly 40-year history — to renew assistance for at least the same number of families from year to year.  Meanwhile, thousands of other low-income families using vouchers could face sharp rent increases.

These cuts, which housing agencies have already begun to implement, will fall heavily on vulnerable people:

• In Los Angeles, hundreds of families at the top of the waiting list will not receive vouchers, the city housing authority may soon raise rents for 45,000 low-income families by $100 – $200 per month, and, by October, the county housing authority may terminate as many as 1,800 vouchers;
• The city of Marlborough, Massachusetts, expects to increase rent by an average of 45 percent for Section 8 voucher recipients; and
• In Muskogee, Oklahoma, the housing authority lacks the funds to issue more vouchers — which means that 45 fewer families will be assisted this year — and it may be forced to cut the vouchers of some families that are now using them.

The cuts come at a time when the number of low-income families that need housing assistance has been rising substantially, there are long waiting lists for vouchers in almost every community, and homelessness remains a persistent problem.

Overall, sequestration will cut more than $2 billion in 2013 from the housing assistance and community-development programs of the Department of Housing and Urban Development.  While cuts in housing vouchers and homeless assistance will probably affect low-income families the most in the near term, sequestration will also contribute to further losses of public housing, impede the development of affordable housing for low-income seniors and people with disabilities, cause more low-income children to be exposed to lead-based paint in older rental housing, and cut counseling services for families at risk of foreclosure.

Click here to read the full paper.

The artificial distinction between tax expenditures (credits, deductions, and other tax breaks) and spending programs “make[s] it harder to gauge the impact of the federal budget on such crucial activities as housing,” a recent New York Times story explains, noting that the mortgage interest deduction — which mostly helps high-income people — costs far more than spending programs to help low- or moderate-income people afford housing.  The story continues:

“If someone said, ‘Let’s have a voucher program on the spending side, giving high-income families vouchers to subsidize their mortgages,’ ” said Glenn Hubbard, the dean of Columbia Business School and a prominent Republican economist, referring to the home mortgage interest deduction, “I don’t think that would get through Congress.”

That’s why we’ve called for rebalancing federal housing policy by creating a renters’ tax credit to help low-income families afford housing.

Policymakers have focused for decades on policies to increase homeownership, and most federal housing dollars benefit families with relatively little need for assistance.  More than half of federal dollars for housing benefit households with incomes above $100,000 (see chart).

Meanwhile, the nation’s lowest-income renters are far likelier to struggle to pay for housing — and their affordability problems are growing.

A renters’ credit, administered by states and 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; 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 guidelines).

It’s the right time to consider such a credit, as policymakers consider restructuring tax expenditures as part of tax reform.  Proposed changes to the mortgage interest deduction (such as converting it to a credit) could make homeownership-related tax expenditures more efficient and raise added revenues to reduce the deficit.  And, by directing a modest share of the savings from these or other tax reforms to the renters’ credit, policymakers could make the nation’s housing dollars fairer and more effective.