A report published by the Terner Center for Housing Innovation, “Options for Addressing Rent Burdens through the Tax Code: Considerations for Designing a Renter’s Tax Credit,” details key questions for policymakers to consider when designing a tax credit to address the high costs of rental housing. A renter’s tax credit could assist renters by either reducing their taxable incomes or by providing them with an income tax refund. However, key design and implementation options – such as whether the credit would be available to all renters or targeted to some; refundable or nonrefundable; based on income or housing cost burdens; and how eligibility would be verified – could impact who would benefit from the credit and which affordability goals would be advanced. The report also provides estimates of the probable costs of various tax credit models if implemented in California.
One critical design consideration for a tax credit is whether a renter’s eligibility should be based on their income alone, or both income and rent, and how each is calculated. A credit based solely on income would be the simplest to implement. Income could be calculated using existing Adjusted Gross Income (AGI) or taxable income – the income that remains after subtracting deductions from AGI. Considering total income net of taxes – including adding nontaxable income, subtracting existing credits, and accounting for payroll taxes – would more accurately represent income renters can use for housing. This method would involve tradeoffs as well. Accounting for payroll taxes would increase eligibility for workers and their families, while including credits like the Child Tax Credit would reduce eligibility for families with children.
Eligibility could also be determined by using both income and rent to identify tax filing units with housing cost burdens – those spending more than 30% of their income on housing costs. Rents used to calculate cost burdens could be determined based on reported rent, a predefined rent standard such as HUD’s Fair Market Rents (FMRs), or a combination of the two. The authors estimate that 57% of California’s renter tax-filing units would qualify if reported rents were used to calculate cost burdens, and 78% would qualify if FMRs were used. If renters report the amount of rent paid but the credit is capped at the local FMR, half of renter tax-filing units would be eligible for the credit. While this approach increases administrative burden, it reduces the likelihood that those who live in more expensive housing units benefit more than those who do not. If rent is determined based on reported rent, self-attestation of rent paid would reduce administrative burdens and remove barriers to applying for the credit, particularly for renters who sublet, lack formal leases, or have unresponsive landlords.
Credits could be designed to assist all renters or to target populations of renters, such as those with the lowest incomes or those with the highest cost burdens. In California, for example, renters with annual incomes below $30,000 account for half of all cost-burdened renters in the state and 76% of all severely cost-burdened renters. It would take $10.4 million in assistance to end cost-burdens for California’s 1.3 million rent-burdened tax units. Narrowing eligibility to the 490,000 cost-burdened tax units with incomes below $30,000 reduces the assistance needed by more than half to $4.9 million.
Credits could be refundable or nonrefundable. Nonrefundable tax credits only reduce income tax liability and would not result in a refund if the amount of the credit is more than taxes owed. Refundable credits, in comparison, would result in a refund of any remaining balance of the credit that exceeds taxes owed (or the entire credit if no taxes are owed). Two in three of California’s rent-burdened tax-filing units do not owe state taxes and would only benefit from a state refundable tax credit, and less than half do not owe federal taxes and would only benefit from a federal refundable tax credit. More than half of renter tax units with incomes below $30,000 and all with incomes below $10,000 do not have income tax liabilities, making them ineligible for nonrefundable tax credits.
The authors also discuss the impacts of decisions such as when the credit could be claimed and when it could be dispersed, as well as eligibility for renters who receive other housing subsidies but still experience cost-burdens. They discuss how complexities with credit design and required documentation could negatively impact renters’ ability to apply for a credit. Notably, the authors estimate that 16% of cost-burdened renters do not ordinarily file taxes and suggest the use of administrative data and outreach to identify these populations and inform them about the credit. The authors conclude that a renter’s tax credit is just one tool to relieve affordability challenges. However, other solutions, such as increasing the supply of affordable housing, are still needed.
Read the report at: https://bit.ly/3XVdpxE