Kriston Capps is a staff writer for CityLab covering housing, architecture, and politics. He previously worked as a senior editor for Architect magazine.
The 2020 Democratic Party hopefuls are both planning bills that would create a tax credit for housing rental assistance every month. How would that work?
Two 2020 presidential hopefuls plan to introduce bills that may incorporate a novel feature to address the lack of affordable housing: a tax refund that would be paid out monthly instead of annually.
Senators Cory Booker and Kamala Harris both wrote legislation last year to help out rent-burdened households, and the Democratic lawmakers are buffing new versions of those bills for another push this session. According to aides, the new proposals could boast an unprecedented form of help for housing—a monthly rent check from the IRS. Either bill would represent a sea change for housing assistance and tax policy, especially if they reshape how credits and refunds work.
The dueling bills from declared White House hopefuls reflect the idea that the American housing crisis will be a 2020 election issue. The rent is way too damned high for far too many households in the U.S.: More than one-third of households nationwide pay more than 30 percent of their earnings toward the rent, the definition of rent burden. Some 7 million households are severely rent burdened, meaning they pay more than 50 percent of their income on rent. This burden falls hardest on extremely low-income households, since they must compete with households higher up the poverty ladder for the vanishingly small share of affordable apartments available.
Currently, there’s nothing like a monthly tax credit in the tax code. The IRS doesn’t issue any payment to taxpayers on a monthly basis, according to Elaine Maag, principal research associate at the Urban Institute and Tax Policy Center. Providing housing aid through a tax credit offers attractive advantages, but also defining drawbacks. The success of this particular approach, if it ever makes it into law, will depend on the scope of the program—the bigger, the better.
“Would it be easy? No,” Maag says. “Would [the IRS] have to change and modernize? Yes.”
Details of Harris and Booker’s bills are bound to change as they’re revised for re-release, especially if the senators decide to shake up how the rental tax credits work, as both are considering, according to aides. But here’s how they currently would work:
Harris’s Rent Relief Act of 2018 floated a tax credit to make housing more affordable for both low- and middle-income households. Her bill establishes a sliding scale for the percentage of excess rent that a taxpayer could claim. A rent-burdened household making $25,000 per year, for example, would be eligible to claim 100 percent of the excess rent (the share higher than 30 percent) as a credit. Rent relief isn’t limited to low-income families: In many areas, households making up to $100,000 would be eligible for some credit.
Consider how a family in Baltimore might fare under Harris's plan. The fair market rent set by the U.S. Department of Housing and Urban Development for this metro area for 2019 works out to be $1,342 for a two-bedroom unit. A household earning about $53,680 after taxes and paying this rent would be right at the 30 percent rent-burden margin. For a household making the median income for Baltimore County ($46,641), the fair market rent would represent 34 percent of their pay. Under Harris’s plan, this household would get 75 percent of the excess rent in a credit—meaning about $155 per month.
Booker’s Housing, Opportunity, Mobility, and Equity Act of 2018, on the other hand, would enable any household paying more than 30 percent of its income on the rent to claim the excess paid through the tax credit. The bill sets a cap on the maximum rent allowable, using HUD's fair market rents—so renters living large in luxury units are mostly out of luck. (So does Harris’s bill, although hers sets the cap at 150 percent of the fair market rent.)
Among other things, Booker’s HOME Act takes a stab at shifting tax policy. The bill includes a proposal for a “refund to rainy day savings” program that would allow taxpayers to defer 20 percent of their refund payments for a later date. Letting taxpayers squirrel away part of their refund in the ultimate untouchable account (the Treasury’s vaults) is a first step toward a monthly tax credit payment, which Booker’s aides described as more aspirational.
Should the Senate implement a monthly tax credit payment, these laws could help households to “smooth” their consumption over the year. Research from the Federal Reserve and the Tax Policy Center shows that families who receive the Earned Income Tax Credit are among the first to file, and they tend to use their refunds to make up for expensive holidays by paying either overdue heating bills or restocking their pantries. An excess-rent tax credit that arrived with returns would mean another springtime bump for taxpayers, while a monthly payment would help them to smooth their spending around the calendar year.
The senators may be looking to the University of California, Berkeley’s Terner Center for Housing Innovation, which has been talking about a tax credit for rent-burdened low-income households since 2016. A monthly payout option reflects an ongoing conversation in wonky tax-policy circles about how programs like the Earned Income Tax Credit could better serve the families that rely on them.
But a monthly tax credit is not an easy proposition. “Today’s IRS faces extreme budget constraints. Congress doesn’t seem to be interested in allocating a substantial amount of money for them to modernize and update their systems,” Maag says. “Asking them to do any additional task could be quite daunting.”
The cash-strapped agency does have some limited experience with monthly payouts, thanks to the Affordable Care Act, which mandates monthly premium tax credits to insurance providers. The IRS, which administers the premium tax credit with the Department of Health and Human Services, has so far proven it can handle the load. The agency is good at delivering payments directly when the necessary administrative data are robust and reliable.
“Every time a new program gets enacted in the tax system, we say, ‘The IRS could never do this.’ And lo and behold, they do.”
Paradoxically, perhaps, the IRS would have an easier time implementing a monthly tax credit that applied to a broad tax base, even without more resources. When the agency has to go searching to find the target households eligible for the credit, it is more liable to make mistakes, which could put the entire program at risk.
“The more universal the program is, the more the IRS can rely on information they already have,” Maag says.
The advantages to asking the IRS to help with the rent (as opposed to, say, HUD) are many. For better or worse, it’s easier to implement changes in policy through the tax code today than to authorize new or increased spending. Social safety net spending has plunged over the last 40 years, falling to shocking new lows as a result of the sequester in 2011. The White House wants to pare spending on aid for housing, food, and healthcare to the bone.
Another boon: Almost everyone who is eligible for a broad tax credit gets one. That’s hardly the case for spending programs. Only 25 percent of households eligible for rental assistance receive aid. On the other hand, spending programs usually implement an asset test to make sure that households who shouldn’t be receiving aid don’t qualify. Empty-nesters who own a house but also rent a pied-à-terre in a high-cost city aren’t the ideal recipients for a tax-credit subsidy, but TurboTax may have trouble weeding them out.
There are other hurdles to a renter tax credit: It’s not entirely clear where the IRS would get the data it needs to find out who’s rent burdened. Extremely low-income households—including many seniors and disabled individuals who face the steepest rent burden of all but who don’t file tax returns—would be invisible to the program. There could be distortionary effects, too. In certain circumstances, rent hikes could actually benefit renters and landlords alike—although it’s only the excess over 30 percent that renters can claim (not the whole rent). And at least in Harris’s bill, nothing at all for higher-earning households.
The goal of a monthly rent burden tax credit would be to ease the pressure that high housing costs put on Americans. Low-income families especially defer payments on medicine, food, and utilities in order to meet the rent. (As the Federal Reserve’s research shows, when these families get their Earned Income Tax Credit-fueled tax refunds, those are the things they spend it on.)
The best argument for expanding rental assistance through a tax credit, instead of new spending programs, may be that it’s feasible. In today’s political climate, that’s a big plus.
“Congress is very constrained in what they can do,” Maag says. “Spending programs are extremely difficult to expand or pass right now. Tax programs are an easier lift. In that sense, it might be the only thing they can reasonably expect to try.”