Almost all of my posts on housing have been on owner-occupied, as opposed to rental housing, reflecting a bias that’s in both our tax code and our dreams. That is, the American dream supports homeownership, and our housing policies subsidize the dream. Renters tend to get short shrift.
I get it—owning a home, as I do myself, can be a great source of wealth for those of us who don’t own private equity outfits (although let’s not forget that homes can also lose value). But the fact is that one-third of all households are renters, and our housing policies tend to skew against them.
Most of the benefits of the mortgage interest tax deduction, for example, accrue to higher income households. In fact, 75% of all federal housing benefits support homeownership and half of those supports go to households with incomes above $100,000.
It’s also the case that rents have become increasingly steep relative to incomes, especially for those of lesser means. More than seven million low-income families without rental assistance pay more than half their income to rent their home or apartment, and renters are more than twice as likely to do so (to spend more than half their income on housing) compared to owners with similarly low incomes. The figure below shows the divergence since the early 2000s between monthly incomes and monthly rents for the median renter. Note that while housing prices went bust in 2007, falling more than 30% since then, rental prices kept rising after a brief stall.
It was in the context of such information that I looked with great interest at an idea by some of my CBPP colleagues for a new tax credit for renters. Here’s how it could work:
Congress would create the credit, which it could cap at $5 billion a year, and finance through the reform of homeownership tax deductions [see below]. The federal government would then give each state authority to distribute a certain amount of credits. Families assisted with credits would generally pay 30 percent of their income for rent, and property owners (or sometime banks that lend to them) would receive credits on their federal tax returns in exchange for rent reductions.
According to analysis in the above link, a credit capped at $5 billion per year and targeted at low-income renters could:
- Reduce the monthly rent of over a million of the lowest-income renter households 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 guidelines).
As noted, we’d pay for it without raising new revenue but by shifting some of the current housing subsidies from high-income homeowners to low-income renters. From the report:
The cost of such a credit would represent less than 5 percent of total federal homeownership tax expenditures. It would amount to less than 20 percent just of the cost of the mortgage interest and property tax deductions now provided to taxpayers with incomes above $200,000, who likely would not encounter serious difficulty in purchasing a home if the subsidies they received were more modest. Using a portion of the savings from reforming the homeownership tax expenditures to fund a renters’ credit would complement existing programs and make the nation’s housing spending considerably more equitable and effective.
This looks to me like a smart tradeoff that would both reduce a distortion in the current tax code while helping some hard-pressed folks have a little more money left over after paying the rent. And retaining ownership subsidies to families of more modest means, neither does it dampen the dream of homeownership. It just faces the reality of hardship among too many renters.
Suggestion: turn the mortgage interest tax deduction into a 15% or 20% tax credit. Basically, remove the bias in favor of higher-income taxpayers relative to those with lower incomes.
That’s a good approach but the key issue is that we are providing tax subsidies way beyond helping people to buy and own their own homes. The current cap (interest on loans up to a million dollars) is far too high and more than one home is allowed. Coincidentally, many of our representatives in Congress want it this way for themselves. We could reduce the cap by three-quarters and still provide a valuable tax break for people who want to live the dream of owning their own home. A much lower cap would accomplish this goal for most homeowners without providing additional benefits to people in high brackets buying McMansions and second homes.
Hard to imagine anything like this passing our dysfunctional congress. Helping poor people just isn’t on the radar, for either party.
Suggestion: we get rid all federal involvement in housing including both tax credits and agencies such as the FHA, Freddie and Fannie. On the local level, promote deregulation — i.e. less restrictive zoning — that boosts supply and lowers housing prices and rents.
The last thing our tax code needs is yet another credit for some kind of economic activity.
Supply and demand does not work in necessity markets, and rental housing is definitely a necessity market. Increasing supply can, in some cases, produce what John Gilderbloom described as the “boomtown” effect, where increased supply increases rents.
Affordable housing is not produced by eliminating zoning regs and letting the market do its thing. It’s produced when government agencies put money into producing affordable housing.
Bad tenants are such a pain. Have you looked into the landlord protection agency? You really have to make sure you search for a rental credit report.