Housing markets across America are in dire need of reforms to expand housing supply and alleviate the rent burden felt by a growing share of tenants. In 2018, 47.5 percent of renting households were moderately cost-burdened, meaning they spent more than 30 percent of their incomes on housing. An additional quarter are severely cost-burdened, with more than 50 percent of their incomes going toward housing. These unsustainable costs are mostly the result of restrictions on housing supply that push up rents, particularly in major urban areas.
Homes may be scarce, but there is no shortage of proposed solutions to the housing affordability problem. Most recently, several Democratic lawmakers have proposed creating a new renters’ tax credit to effectively cap what a tenant pays for rent at 30 percent of their income. Tenants would still pay the same rent on paper, but the tax credit would make up any difference, with the subsidy targeted at lower-income populations.
Enter the DASH Act
The latest iteration of this policy was unveiled in August by Senator Ron Wyden (D-OR) in his Decent, Safe, Affordable Housing for All (DASH) Act. It takes the form of a tax credit for landlords renting to tenants with low incomes. To qualify, a tenant has to be below the federal poverty line or earn less than 30 percent of the area median income. These tenants would pay at most 30 percent of their incomes in rent. In return, landlords who sign a binding contract with reduced rent would receive a tax credit worth 110-120 percent of the difference between the rent they charge and the market rate for a similar unit. The comparable rents would be based on one of two measures produced by the Department of Housing and Urban Development, the Small Area Fair Market Rate (SAFMR) in metropolitan areas and the Fair Market Rate (FMR) elsewhere. Landlords would therefore be financially incentivized to house lower-income tenants without fear of not getting paid.
The DASH Act’s renters’ tax credit comes with a hefty price tag of more than $10 billion annually. This sum would represent an enormous increase in rental demand focused in the very housing markets where cost inflation already runs rampant due to restrictions on supply. As a consequence, this and similar tax credit proposals run the risk of accelerating the inflationary cycle, driving housing costs ever higher.
Enriching landlords while distorting incentives
The DASH Act risks distorting the incentives facing landlords and housing developers alike. Even though the SAFMR increases the granularity of HUD’s estimates of Fair Market Rates down to the ZIP code level, that still leaves a lot of room for geographic variation. It would not be difficult for landlords to find blocks where apartments rent below the SAFMR and then pocket the difference. This mechanism was described by Matthew Desmond in his book Evicted, applied to an analogous effect with housing vouchers:
In 2009, […] the FMR for a four-bedroom unit in Milwaukee County was $1,089. But the average four-bedroom apartment in the city rented for much less: $665.40. When landlords were allowed to charge more, they did.
In other words, landlords catering to housing voucher recipients could be paid up to the FMR rate, allowing them to charge rent that was above-market by $55 a month on average for the blocks on which their properties were located. At the time, only 6 percent of Milwaukee renters were voucher holders. A renters’ tax credit, by contrast, would have a much broader reach and range of eligibility, greatly increasing the share of tenants who provide landlords a riskless profit. Rent inflation on the blocks with the poorest and most at-risk tenants would surely follow, with taxpayers bearing the cost.
From the tenant’s perspective, the sharp cut-off for eligibility would create incentives against earning an income above the poverty threshold, or at a level that otherwise causes the subsidy to be withdrawn. The binding commitment from the landlord to offer reduced rent would further risk reducing tenant mobility and trapping low income families in place — a ubiquitous problem with rent controlled apartments of all types.
A renters’ tax credit like that proposed by the DASH Act would represent an enormous wealth transfer to landlords, but not just any landlords. The biggest beneficiaries would be in the richest and most segregated parts of the country. Out-migration from high-cost cities is one of the few structural forces that puts pressure on exclusionary jurisdictions to reform. Landlords in expensive markets would now be paid to maintain the status quo, while regions with flexible housing markets, lower overall costs of living, and lower per-capita incomes would suddenly all be put at a competitive disadvantage. Why take that job in San Antonio, Tex., or Columbus, Ohio, or Glendale, Ariz., where the median rent is nearly one-third that of New York City or San Francisco, when you can have the amenities of the latter at the same cost? By violating horizontal equity, a core principle of public finance, a renters’ tax credit would risk deepening our already-gaping geographic divides.
The DASH Act also includes an expansion of the Low-Income Housing Tax Credit (LIHTC) and would create an analogous Middle-Income Housing Tax Credit. To date, the LIHTC has been used to build millions of apartments. However, these projects are on average costlier than unsubsidized equivalents, and are not the most efficient way to solve the housing shortage given the propensity for LIHTC units to crowd out unsubsidized construction.
Build, build, build
Despite its problems, the DASH Act contains a provision that hints at a more promising approach to promoting housing affordability. The “Supporting Pro-Housing Development” section would financially incentivize jurisdictions to get rid of stringent zoning rules. Grants would be available to jurisdictions that enact measures to expand the supply of housing, from authorizing the construction of bigger buildings to allowing accessory dwelling units in areas zoned for single-family homes. As argued in the recent Niskanen report Cost Disease Socialism, housing market liberalization is the only way to robustly expand the supply of housing in our unaffordable cities and thus attack the problem of rental costs at its root.
Disappointingly, this section gets only $4 billion in annual appropriations, less than half that allocated for the renters’ tax credit. For a city with 100,000 to 500,000 residents, enacting more lenient zoning rules would be rewarded with grants on the order of $40 million — a drop in the bucket for most city budgets. It’s possible that $4 billion in federal incentives would tip the scales for localities in favor of more liberal zoning regulations, though this remains to be seen. What is without question is that increasing subsidies for housing demand without commensurate increases in supply will only continue the vicious cycle of higher rents, enriching landlords at the expense of poorer regions and more responsible jurisdictions, not to mention federal taxpayers. If we want the dollars spent supporting housing for low income families to go farther, we must induce the kind of housing development that increases supply across the board.
Samuel Hammond is the Niskanen Center’s director of poverty and welfare policy.
Antoine Dejean is in his last year at SciencesPo Paris, France’s leading university in politics and public policy, and a poverty and welfare policy intern at the Niskanen Center.
This commentary is part of our Captured Economy of Cost Disease series exploring the political economy of debt and deficits. It is made possible thanks to the support of the Peter G. Peterson Foundation.
Photo: Peterspiro via iStock