Senator Harris’s Rent Relief Tax Credit is a Well-Intentioned Misfire

July 25, 2018

Last week, Senator Kamala Harris (D-CA) introduced the Rent Relief Act of 2018 that would amend the tax code to “allow for a credit against tax for rent paid on the personal residence of the taxpayer.” The bill calls for tax credits to renters who earn less than $100,000 and spend over 30 percent of their income on rent and utilities. However, despite Senator Harris’s case that this new tax credit would lessen the burden of rent for lower-income individuals and families, such a tax credit program would distort the housing market and benefit landlords more than it would benefit renters. Furthermore, the program fails to address the reasons housing prices are so high.

The tax credit program would distort decision-making for renters towards choosing more expensive properties. For example, someone who currently spends just under 30 percent of their income on rent would have an incentive to move to a more expensive apartment where rent is above 30 percent of their income to qualify for the tax credit.

As Jeffery Dohrman pointed out in Forbes, the connection between new federal subsidies and higher prices has been shown in many other markets. For example, a Federal Reserve study found that for every dollar of federal aid for higher education, colleges raised their prices by 65 cents, meaning that students only receive 35 percent of the benefits of these subsidies.

This phenomenon also appears in the case of the low-income housing tax credit (LIHTC), an existing program to encourage the construction of low-income housing through credits to both individuals and corporations. An NPR report noted that the program has led to the creation of fewer houses since 1997, while the program’s cost has risen by over 50 percent; moreover, many of the houses constructed using the LITHC would have been constructed anyway. The Congressional Budget Office found that the tax credit may allow investors and developers to capture much of the benefits, while only providing tenants with moderate assistance.

Aside from these distortions that call into question the program’s effectiveness, Senator Harris’s bill would also have significant costs. As the Los Angeles Times notes, Harris’s program is modeled after a proposal from the Terner Center for Housing Innovation at University of California-Berkeley. The Terner Center proposal was estimated to cost $76 billion per year. For context, making all of the individual income tax provisions of the Tax Cuts and Jobs Act permanent reduces federal revenues by $165 billion on an annual basis.

The only way to make housing more affordable is to increase the supply of housing. As Lynn Fisher of the American Enterprise Institute noted to Reason, “If [Senator Harris’s bill] increases market demand and the supply doesn’t expand with this, if supply can’t expand, then simply what’ve you’ve done is to raise rents in many of these areas.”

Ultimately, Senator Harris’s rent relief bill would fail to address the root causes of the high cost of housing. Instead, it would wind up benefiting landlords, not significantly improving the lives of renters, and carrying a hefty price tag.

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