Economics21

search
Close Nav

What the Harris and Booker Housing Proposals Get Wrong

commentary

What the Harris and Booker Housing Proposals Get Wrong

February 11, 2019

Few spheres of the economy are subject to more government intervention than the housing market. At the federal level, the mortgage interest deduction has historically been among the most costly tax expenditures. In addition, HUD provides subsidies for some 5 million housing units, home to just under 10 million people. The Low Income Housing Tax Credit, allocated by the IRS to states to distribute to developers, costs the Treasury another $9 billion annually. If all that weren’t enough, zoning at the local level determines, in fine detail, what sorts of housing can be built and where. It should thus come as no surprise that there is not an adequate supply of housing for the full range of income groups, especially in the nation’s most prosperous cities, where zoning often acts a brake on supply.

Unfortunately, two presidential candidates’ proposals to make housing more affordable—one by Kamala Harris, the other by Cory Booker—will only distort the market more, offering little real help to the tenants who are the intended beneficiaries.

The Harris-sponsored Rent Relief Act would authorize a refundable tax credit for those earning as much as $100,000 a year and paying 30 percent or more of income for rent, including utilities. (‘Refundable’ means one gets the tax refund even if one has paid no income taxes). In high-rent cities, the income floor would rise to $125,000. Harris’ target beneficiaries are the half of the renters in the country’s 53 largest cities who spend more than 30 percent of their income on rent.

Senator Booker sees all that and raises it. He proposes a more detailed renter tax credit for those earning 80 percent of an area’s median income and who allocate more than 30 percent of that income to housing. He’d also amend federal housing legislation to encourage higher-density zoning and other supply incentives—including the taxing of vacant land—and require that 20 percent of new housing units in jurisdictions receiving federal community developing funding be “affordable” (that is, targeted to specific lower-income groups).

Any program that sets an upper income limit for receiving benefits runs a clear risk: households will take steps to keep their incomes below that level in order to continue receiving benefits. That’s a key problem, for instance, with the Earned Income Tax Credit, which supplements the earnings of households with incomes up to $50,000. The credit diminishes as incomes rise—and discourages two-earner households as a result. Likewise, Harris’s and Booker’s plans create a new work disincentive that would be added to one that already exists for those five million households who get housing subsidies: because the plan is indexed to their earnings, the more they earn the higher their rent.

The other problem with these two plans is that they are partly premised on an outdated trope: that, because we subsidize the housing of the rich through the mortgage interest deduction, we should do the same for the poor. The 2017 tax reform bill, however, has changed this calculus dramatically. According to the Tax Foundation: “The Joint Committee on Taxation estimates that the number of filers who itemize will fall from 46.5 million in 2017 to just over 18 million in 2018, meaning that about 88 percent of the 150 million households that file taxes will take the increased standard deduction.” This means that the number of households receiving the mortgage interest deduction—for which one must itemize—will plummet: its value is expected to fall from $83 billion to $36 billion.

Although it’s true that the remaining itemizers will be wealthy, they will be hit in another way. They will no longer be able to deduct more than $10,000 of their state and local taxes, including property taxes, which are keyed to the value of their homes. The magnitude of that tax expenditure will also dive, from $122 billion to $24 billion. That means that taxes on wealthy taxpayers in high-income, high-tax blue states like New York and California will go up accordingly (property tax bills in wealthy New York City suburbs can top $150,000 a year). Put another way, when it comes to housing, Republicans are now actually soaking the rich, while progressive Democrats are the main advocates for repealing the limits on state and local tax deductibility.

It’s also worth noting that an NYU study tracking the extent of “rent-burdened” lower-income households finds that that number is actually falling: “Despite rising rents, the share of renters spending more than 30 percent of their income on rent (defined as rent burdened households) fell slightly between 2012 and 2015, as did the share spending more than 50 percent (defined as severely rent burdened households).” One can expect that, with falling unemployment and rising incomes, that trend will only continue.

This is not to say, of course, that there aren’t housing policy reforms worth undertaking. Harris and Booker would be far better advised to simply fix rents for subsidized tenants, so they can pocket any increase in income. At the same time, tenants should have a subsidy time limit (as welfare recipients do) in order to make subsidy programs transitional and reduce waiting lists for public and subsidized housing. Booker is not wrong to want to encourage higher-density zoning; it’s just that the federal government does not have much power to do so. HUD Secretary Ben Carson has, in fact, proposed making the receipt of federal community development funds contingent on such zoning reform—but not to specify that units be officially “affordable,” which implies they’re being subsidized in some way. Booker, not surprisingly, does not make reference in his announcement to the Carson idea—even though there’s some overlap and a joint proposal would be noteworthy (though probably not attractive to Democratic primary voters).

Housing policy is, for the most part, a local matter. High-income jurisdictions have begun to understand that some sort of “densification” (my term) is the only way they can accommodate the housing needs of new, younger residents. Minneapolis and Seattle have both considered modest upzoning to permit more housing density in single-family districts. San Jose officials were receptive when I presented a paper there that called on cities to make housing affordable by permitting more units on land that had previously been zoned only for single-family homes.

One final question with respect to these two housing proposals: When considering the needs of low-income households, is it really best to focus on housing without reference to other factors? As my colleague Oren Cass has noted in regard to Medicaid, low-income households might prefer to decide for themselves how to spend their income. Some households might prefer to pay more than 30 percent of their income for housing in order to live in a better neighborhood, for instance, while choosing to scrimp on other expenses.

The unforeseen consequences of federal meddling in the housing market are vast. Better to start to roll it all back rather than adding yet one more awkward fix.

Howard Husock is vice-president for policy research and publications at the Manhattan Institute.  He is the author of “America’s Trillion-Dollar Housing Mistake:  The Failure of American Housing Policy” (Ivan R. Dee, 2003).

Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, E21 delivers a short email that includes E21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the E21 Morning Ebrief.

Photo by Pool / Getty Images

 

e21 Partnership

Sign up for our MORNING E-BRIEF for top economics commentary:

By clicking subscribe, you agree to the terms of use as outlined in our Privacy Policy.

 

 

 

 

 

 

 

 

ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed
ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed
Close