The Unintended Consequences of Senator Booker’s “Renters Credit”

June 12, 2019

On June 5, Senator and presidential candidate Cory Booker (D-NJ) released a plan to increase access to affordable housing. While this proposal would likely decrease the amount that low-income individuals pay in rent, the policy could perpetuate the trend towards high-cost rentals and have pervasive effects on the housing market.

With the goal of capping housing costs at 30 percent of a renter’s income, the proposal offers a refundable tax credit that would fully refund the difference between 30 percent of a renter’s household’s income and the renter’s neighborhood’s fair market rent.  There was no mention of an income cap to receive these benefits, and the estimated median credit for those who benefit would be $4,800 a year. 

Senator Booker’s renters’ credit is flawed. The policy would encourage people to move into units out of their price range, because the government would take on the higher bill. This shift in demand could further promote one of the causes of the current housing crisis—the mass construction of high-end rather than affordable housing to meet the need for pricier units. Landlords would have little to no incentive to price their units at lower rates because consumer demand below the fair market rent rate would be indifferent to price changes. This could push prices upward, inflate the median neighborhood rent, and greatly increase the costs of the program.

Also, given that tax credits such as this can only be claimed by U.S. citizens, the increases in rent would fall heavily on immigrants, who would not qualify. In effect, the proposal would lower costs for some renters and hike them for others, all while handing a taxpayer-funded pay raise to landlords.

In other ways, the Senator’s proposal is a mixed bag. The absence of an income cap to receive these benefits would prevent workers from changing their hours or pay structures in order to qualify. Instead, the credit would naturally phase out as incomes rise until 30 percent is equal to market rates of housing. But while this aspect of the proposal means the law won’t distort labor decisions, the absence of an income cap could make it more difficult to ensure that the credits are going to citizens in need of assistance.

Additionally, the plan includes other non-tax provisions, including incentives for local zoning deregulation. Deregulating land use could expand the supply of housing, increase competition, and drive down rents.

The plan would make renting a home more affordable than buying for most people, creating a bias towards renters within the tax code. However, as Senator Booker points out, the tax code already subsidizes homeownership. These subsidies include the mortgage interest deduction, capital gains exclusion for the sale of a home, state and local property tax deductions, and the exclusion of imputed rent as income. There is general consensus that these homeownership subsidies are highly regressive and have no real effect on homeownership rates. In fact, they have been found to increase the cost of buying a home. In this respect, Senator Booker’s proposal could be viewed as making the tax system more neutral in its treatment of housing; though ideally, the government would move to limit or eliminate the tax biases, not expand them.

The widespread shortage of affordable housing has come to the forefront of political discourse. Various other members of Congress and other presidential candidates have already rolled out their own proposed solutions to the crisis, such as those from Senator Kamala Harris (D-CA), Senators Maria Cantwell (D-WA), and Orrin Hatch (R-UT), and Representative Alexandria Ocasio-Cortez (D-NY). Senator Booker’s new plan contains numerous parallels to legislation Senator Booker introduced last year.

Overall, Senator Booker’s proposal misses the mark for sound tax policy. It could perpetuate the high-cost housing trend it is intended to address and distract from the larger issue of an insufficient low-cost housing supply. 

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