During his campaign, president-elect Joe Biden proposed an ambitious tax plan that would increase federal revenue by $2.1 trillion over the next 10 years. Facing the prospect of a divided Senate, the incoming administration may not have the opportunity to pass sweeping revenue increases. But tax credits for low- and middle-income households may provide an opportunity for bipartisan compromise.
One possible option is a tax credit for renters. Biden and other Democratic candidates proposed versions of an income tax credit for cost-burdened renters as part of their solution to the rising burden of housing costs. Biden’s campaign specifically cited a proposal for a refundable credit equal to the difference between 30 percent of household income and the lesser of gross rent paid and local fair market rent. Biden’s housing plan also called for expanding the Housing Choice Voucher Program to cover all eligible households with low incomes, which, like the renter tax credit, provides subsidies for renters with low incomes. The renter tax credit would cover people and families with low incomes that make too much to be eligible for the Housing Choice Voucher program, and the proposal would cap the credit at $5 billion a year.
Although federal tax rates are progressive, tax policy also benefits homeowners who are wealthier, have higher incomes, and are disproportionally white. Almost any tax policy that tips the scales back toward renters, including renter credits, would increase economic and racial equity.
Current tax policy favors homeowners, creating economic inequality and exacerbating racial inequality
US tax policy has historically discriminated against renters and favored homeowners (PDF). Homeowners enjoy tax deductions unavailable to renters, as mortgage interest and property taxes are deductible, although the 2017 Tax Cuts and Jobs Act capped deductions and reduced the number of people who itemize by expanding the standard deduction. And by owning and living in a property, homeowners are effectively landlords and renters, paying rent to themselves. This untaxed economic gain is the largest tax-related benefit of homeownership.
Tax deductions generally benefit wealthier households because they allow people with higher incomes and higher tax brackets to receive larger tax breaks than lower-income tax filers. Tax deductions tied to homeownership favor the wealthy even more than other tax deductions, as the population that owns homes are wealthier than those that do not, and wealthier people who own more expensive homes can deduct higher levels of mortgage interest.
Renters do not enjoy equivalent benefits at the federal level. Although there are rationales for subsidizing homeownership (PDF), these incentives distort the market by motivating people to borrow more and buy larger homes than they would absent the incentive, causing economic inefficiency.
Structural racism and discrimination in housing subsidies have also led to racial inequity, as Black and Latinx families are more likely to be renters than homeowners. For Black Americans, centuries of discrimination have exacerbated housing inequity by limiting their ability to purchase homes, move to opportunity-rich neighborhoods, and accumulate wealth. Explicitly racist policies, such as racially restrictive covenants in New Deal loan programs prohibiting nonwhite homeownership, redlining by the Home Owners’ Loan Corporation, and other formal and informal discriminatory practices, have enforced and increased racial segregation.
Even after these policies were abolished, theoretically race-neutral policies and practices reinforce their results. In the lead-up to the Great Recession, subprime loans, which have higher costs and foreclosure rates, were disproportionally concentrated in nonwhite neighborhoods. The geographic patterns of segregation and subsequent inequities in wealth and homeownership caused or reinforced by discriminatory practices of the past remain to this day.
Today, the homeownership rate in the US for non-Hispanic white households is 76 percent, according to the Federal Reserve System, yet the homeownership rates for Hispanic or Latino and non-Hispanic Black households are 51 and 47 percent. Tax policies that favor homeowners provide disproportionate benefits to non-Hispanic white households.
Tax credits for renters can increase economic and racial equity
Nearly half of all renters pay more than 30 percent of their income for housing, and more people are expected to face difficulty paying rent. The number of renters is growing faster than the number of homeowners, and the cost of rent is increasing faster than incomes (PDF).
A refundable renter’s tax credit would help people with lower incomes more than tax deductions and could reduce economic inequality. Low-income people are able to receive the full value of a credit that is refundable, rather than having their credit limited by taxes owed. As such, these credits are proportionally more helpful to people with lower incomes than tax deductions, which can only reduce taxes owed. And unlike deductions, the value of a credit does not scale up with income. Because many low-income households have no tax liability, a renter’s credit would need to be refundable to reach households who need it the most.
A renter’s credit could have an income cap, pay out more to those in greater need, or scale with local rents. Its effectiveness as an antipoverty measure will depend on its design, but the effects could be large. A microsimulation model predicted a national renter’s tax credit that covers the difference between 40 percent of income and the lesser of gross rent or fair market rent would reduce poverty by 10 percent among renters.
Unlike policies favoring homeownership, tax credits for renters would increase racial equity, as people of color are more likely to rent, even after accounting for differences in income, education, and other identifiable factors. Tax credits to low-income renters have the potential to increase housing affordability and stability, address racial segregation and isolation from opportunity, and increase access to opportunity-rich neighborhoods and place-based resources.
This post has been updated to reflect that renter tax credits under Biden's tax plan would be in addition to other housing subsidies and would cover people with low incomes who make too much to qualify for the Housing Choice Voucher Program. (Corrected 12/9/2020.)