Terner Center Proposes a Renter’s Tax Credit

The Terner Center for Housing Innovation at the University of California, Berkeley released a new policy paper proposing a tax credit for renters. The Federal Assistance in Rental (FAIR) credit would assist low income renters in a manner similar to the Earned Income Tax Credit. The paper, titled The FAIR Tax Credit: A Proposal for a Federal Assistance in Rental Credit, examines the potential benefits and costs of three policy options and proposes areas for future research.

Under the “Rent Affordability” option, all renter households earning less than 80% of the area median income (AMI) and experiencing a housing cost burden, meaning they are spending more than 30% of their income on rent and utilities, would be eligible for the FAIR credit. Eligible households would receive a refundable tax credit equal to the difference between 30% of their household income and the lower of either their gross rent or the Small Area Fair Market Rent (SAFMR). Fair Market Rents (FMRs) would be used in areas without published SAFMRs. The credit would be provided directly to renters instead of to landlords, which would likely circumvent the challenge of income discrimination that sometimes occurs in the Housing Choice Voucher (HCV) program. Approximately 13.3 million households would receive an average monthly benefit from the credit of $457. Of these households, 5.8 million would be entirely relieved of their housing cost burden and 7.8 million would experience a reduction in their burden because their current rent is higher than the SAFMR. The Rent Affordability option would carry an annual cost of $76 billion. 

The “Rent Reduction” option would function similarly to the Rent Affordability option, but all households earning below 80% of AMI would be eligible, regardless of their cost burden. The credit would cover 12% to 33% of the household’s gross rent or the SAFMR, whichever is lower. The proportion of rent covered by the credit would be scaled to family income. Approximately 15.1 million eligible families would receive an average monthly payment of $227. Of these households, 2.3 million would be entirely relieved of their housing cost burden and 10.8 million would experience reduced cost burdens. The Rent Reduction option would cost an estimated $41 billion annually, significantly less than the Rent Affordability option.    

The “Composite” option is similar to the Rent Reduction option for households earning less than 80% of AMI, but includes an additional targeted component for extremely low income (ELI) households earning less than the federal poverty guideline or 30% of AMI, whichever is higher. Because reaching ELI families through the tax code can be challenging, the targeted component of the Composite option would function as a tax credit for landlords who agree to provide affordable rents for ELI households. The credit would effectively reimburse the landlord the difference between 30% of the renter’s income and the value of the gross rent or SAFMR. Like the HCV program, landlords would conduct tenant income certification and comply with property inspections. Landlords would receive a modest premium in addition to the credit to defray administrative costs. The value of the credit in the targeted component of the Composite option would be capped at $5 billion annually, with the credits allocated through state housing finance agencies.

ELI renters not served by the targeted component would receive the same subsidy as in the Rent Reduction option. The Composite option would provide an average monthly benefit of $237 to approximately 15.1 million households. Three million families would be entirely relieved of their cost-burdens, while 10.1 million would experience a reduction. The Composite option would cost an estimated $43 billion annually.

All three proposals pose unique challenges. First, the IRS does not currently have an established mechanism to provide a direct federal tax credit that accounts for regional differences in housing costs and incomes. A second challenge is determining how to use the tax code to supplement a monthly expense like rent when tax refunds are typically delivered in a single annual payment. Finally, using the tax code to provide a direct subsidy to renters may require extensive outreach to the lowest income renters who are least likely to file federal income tax returns.

The paper also identifies important areas for further research to advance the discussion of a renter’s tax credit. In particular, the authors highlight the need to better understand the potential impact of the FAIR credit on the housing market, the potential avenues for fraud, the intersection of the FAIR credit with existing housing assistance programs, and the challenge of measuring and tracking income from various sources, especially those sources for which the IRS does not require reporting like Supplemental Security Income (SSI) and Temporary Assistance to Needy Families (TANF).

The FAIR Tax Credit: A Proposal for a Federal Assistance in Rental Credit is available at: http://ternercenter.berkeley.edu/fair-tax-credit