Housing markets across America are in urgent need of reform to expand the housing supply and ease the rent burden felt by a growing share of renters. In 2018, 47.5% of renter households were moderately overburdened with costs, meaning they spent more than 30% of their income on housing. An additional quarter is heavily affected by costs, with more than 50 percent of their income going to housing. These unsustainable costs are mainly the result of restrictions on the supply of housing that push up rents, especially in large urban areas.
Housing may be scarce, but there is no shortage of proposed solutions to the problem of housing affordability. More recently, several Democratic lawmakers have proposed creating a new tenant tax credit to effectively cap the rent a tenant pays at 30% of their income. Tenants would still pay the same rent on paper, but the tax credit would make up any difference, as the subsidy was intended for low-income populations.
Enter the DASH law
The latest version of this policy was unveiled in August by Senator Ron Wyden (D-OR) in his book Decent, Safe, Affordable Housing for All (DASH) Take action. It takes the form of a tax credit for landlords renting to low-income tenants. To qualify, a renter must be below the federal poverty line or earn less than 30 percent of the region’s median income. These tenants would pay no more than 30 percent of their income in rent. In return, landlords who sign a binding contract with a reduced rent will receive a tax credit worth 110-120% of the difference between the rent they charge and the market rate for similar accommodation. Comparable rents would be based on one of two measures produced by the Department of Housing and Urban Development, the Fair Market Rate for Small Areas (SAFMR) in metropolitan areas and the Fair Market Rate (FMR) elsewhere. Landlords would therefore be financially encouraged to house low-income tenants without fear of not being paid.
The DASH Tenant Tax Credit comes at a steep price of over $ 10 billion a year. This would represent a huge increase in rental demand concentrated in the very housing markets where cost inflation is already rampant due to supply restrictions. As a result, this tax credit proposal and others like it risk accelerating the inflationary cycle, pushing up housing costs.
Enriching owners while distorting incentives
The DASH law risks distorting the incentives faced by property owners and developers. Even though the SAFMR increases the granularity of HUD’s estimates of fair market rates down to the postcode level, this still leaves a lot of room for geographic variation. It would not be difficult for owners to find buildings where apartments are rented below the SAFMR and then pocket the difference. This mechanism was described by Matthew Desmond in his book Forced out, applied to a similar effect with housing certificates:
In 2009, [â¦] the FMR for a four-bedroom unit in Milwaukee County was $ 1,089. But the city’s average four-bedroom apartment was renting a lot less: $ 665.40. When the owners were allowed to charge more, they did.
In other words, landlords caring for housing voucher recipients could be paid up to the FMR rate, which would allow them to charge above-market rent of $ 55 per month on average for blocks on which were their properties. At the time, only 6% of renters in Milwaukee had voucher holders. A tenant tax credit, on the other hand, would have a much wider scope and range of eligibility, dramatically increasing the share of tenants who provide landlords with a risk-free profit. Inflation of rents on blocks with the poorest and most at risk tenants would surely follow, with taxpayers bearing the cost.
From the tenant’s perspective, the tight eligibility threshold would create incentives not to earn income above the poverty line, or at a level that would otherwise result in withdrawal of the subsidy. A landlord’s binding commitment to offer reduced rent would further risk reducing tenant mobility and trapping low-income families in place – a pervasive problem with controlled rent apartments of all types.
A tenant tax credit like the one proposed by the DASH Act would represent a huge transfer of wealth to homeowners, but not just any landlord. The biggest beneficiaries would be the richest and the most segregated parts of the country. Emigration from high-cost cities is one of the few structural forces pushing exclusionary jurisdictions to reform. Owners of expensive markets would now be paid to maintain the status quo, while regions with flexible housing markets, a lower overall cost of living and lower per capita incomes would suddenly all be at a competitive disadvantage. . Why take this job in San Antonio, Texas, or Columbus, Ohio, or Glendale, Arizona, where the median rent is almost a third of that of New York or San Francisco, when you can have the latter’s amenities at the same price? By violating horizontal equity, a fundamental principle of public finances, a tenant tax credit would risk deepening our already gaping geographic divisions.
The DASH Act also includes an extension of the Low Income Housing Tax Credit (LIHTC) and would create a similar middle income housing tax credit. To date, the LIHTC has been used to build millions of apartments. However, these projects are on average more expensive than unsubsidized equivalents, and are not the most effective way to address the housing shortage given the propensity of LIHTC units to oust unsubsidized construction.
Build, build, build
Despite its problems, the DASH Act contains a provision that hints at a more promising approach to promoting housing affordability. The section âSupport housing developmentâ would provide a financial incentive for jurisdictions to get rid of strict zoning rules. Grants would be available to jurisdictions that adopt measures to expand the housing supply, ranging from authorizing the construction of larger buildings to authorizing secondary suites in areas zoned for single-family homes. As the recent Niskanen report argues Cost Sickness Socialism, the liberalization of the housing market is the only way to greatly increase the supply of housing in our unaffordable cities and thus to tackle the root of the problem of rental costs.
Unfortunately, this section only receives $ 4 billion in annual credits, less than half of that allocated to the tenant tax credit. For a city of 100,000 to 500,000 people, adopting more lenient zoning rules would be rewarded with grants in the order of $ 40 million – a drop in the bucket for most city budgets. It’s possible that $ 4 billion in federal incentives will tip the balance for communities in favor of more liberal zoning regulations, although that remains to be seen. There is no doubt that increasing demand-side subsidies for housing without a commensurate increase in supply will only continue the vicious cycle of rising rents, enriching landlords at the expense of poorer regions and more jurisdictions. responsible, not to mention federal taxpayers. If we want the money spent on housing low-income families to go further, we need to induce the kind of housing development that increase the supply generally.
Samuel Hammond is the director of poverty and welfare policy at the Niskanen Center.
Antoine Dejean is in his final year at SciencesPo Paris, the leading French university in politics and public policies, and intern in poverty and well-being policy at the Niskanen Center.
This commentary is part of our Captured Economy of Cost Disease series exploring the political economy of debt and deficits. It is made possible through the support of the Peter G. Peterson Foundation.
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