Proposal for a New Federal Renters’ Tax Credit

1. Proposal for a New Federal Renters’ TaxCredit October 9, 2013 Barbara Sard and Will Fischer Center on Budget and Policy Priorities

2. Overview of Renters’ Credit Proposal • Congress would authorize states to allocate federal tax credits to make housing affordable for low-income renters. • Families assisted with credits generally would pay no more than 30 percent of their income for rent and property owners (or sometimes their lenders) would receive a tax credit in exchange. • If capped at $5 billion the proposal could: • help 1.2 million families afford housing, • reduce monthly rents by an average of $400, and • lift four of five of the poorest families it assists out of deep poverty.

3. Context • Tax-writing committees in both houses of Congress are developing tax reform legislation. • Senate Finance Committee options paper includes CBPP’s Renters’ Credit proposal. • Significant increase in the number of families receiving rental assistance under appropriated programs unlikely in foreseeable future. • Federal housing spending is unbalanced; a new renters’ tax credit as a complement to the LIHTC and Housing Voucher (and other rental assistance) programs could make housing spending fairer and more effective.

4. FEDERAL HOUSING SPENDING IS UNBALANCED

5. For the Last 45 Years, Roughly One-Third of Households Have Rented Their Homes

6. Three-Quarters of Federal Housing Expenditures Benefit Homeowners

7. Federal Housing Expenditures Poorly Matched to Need

8. High Income Households Get Four Times More Housing Benefits Than Low-Income Households

9. Rental Affordability Problems Are Getting Worse

10. Most Severely Cost-Burdened Renters Are Extremely Low-Income*

11. HUD Rental Assistance Has Remained Flat Despite Increase in Need

12. How Would a Renters’ Credit Work?

13. Capped Allocation to States with Credit Claimed by Owners or Lenders • Capped allocation: • Can be deeply targeted and effective for low-income families at a more limited cost than an entitlement • State role has administrative and policy advantages • Claimed by owners or lenders: • Largely solves monthly payment problem • Avoids refundability and increase in new filers

14. Allocation Formula to States • Congress could choose to use the same formula as LIHTC (per capita with a small state minimum) or an alternative based on housing need or number of renters. • Appendix 3a of renters’ credit paper compares the LIHTC formula to 3 alternative formulas (all with small state minimum).

15. States Could Use Credit to Achieve Key Policy Goals For example, states could target credits to: • End or sharply reduce homelessness among veterans and individuals with severe health needs. • Prevent placement of children in foster care. • Support work by providing stable housing to jobless or underemployed workers in TANF and other employment programs. • Improve educational outcomes by reducing housing instability among families with school-age children. • Provide affordable housing for elderly people and people with disabilities who would otherwise be at risk of placement in nursing homes.

16. Administrative Issues and Costs • States would bear own administrative costs. • States could minimize administrative costs if allowed discretion over inspections, “rent reasonableness” determinations, and frequency of income verification. • If allocate credits to owners or lenders, could charge fees and/or delegate some tasks (such as income recertifications) and set credit amounts accordingly. • Well-targeted credits could reduce state costs related to institutionalization, chronic health problems, child welfare, etc. • Could allow HOME and CDBG funds to be used, outside of administrative cost cap.

17. Eligibility and Targeting • Eligibility: up to higher of 60% of AMI or 150% of federal poverty line. • Targeting: 75% up to higher of 30% of AMI or 100% of federal poverty line. • Preferences up to states, to enable coordination with other funding streams and further state priorities.

18. Tenant Rent • Families would pay 30% of prior year gross income for rent • “Income” as defined by HUD and determined by state or its agent • States could decide whether to include utility costs in “rent” • At state option, adjustments could be made during year for significant changes in tenant income

19. Credit Amount • Credit would be based on the gap between tenant payment and the rent, capped at the SAFMR (or 85% of SAFMR without utilities) • States could set the credit between 100% of this gap and a cap (perhaps 110%). Credit above 100% would compensate owner for administrative or other costs of accepting credit. • Credit would be taxable, so owner would not get extra benefit from replacing taxable rent with non-taxable credit

20. Sample Credit Calculations

21. Distribution of Credits

22. Tenant-based Credits

23. Project-based Credits

24. Investor receives predetermined stream of credits over multi-year period (up to 15 years at state’s discretion), based on gap between projected unit rent and conservatively estimated tenant rent payments. In return: Investor makes upfront payment to lower debt or capitalize reserve sufficient to make up for rent reduction; or Investor makes annual contributions in predetermined amounts to make up for rent reduction. If tenant rent payments exceed estimate, excess held in reserve to offset any later shortfall and provide continuing deep affordability after end of credit period. If no reserve available to meet an annual shortfall, and state cannot provide added funding (through cash-out of credits or other method) owner could be permitted to admit “regular” tenant[s] on turnover. Project-based Assistance in LIHTC Property

25. Lender-based Credits

26. Unresolved Issues on Lender-Claimed Credit • Compensation to Owners: Lower interest rates likely to be main tool, but possible alternatives include principle reduction (if permitted by regulators) and rebate of a portion of mortgage payments (for short-term credits). • Syndication: Could help non-profit lenders and for-profit lenders with limited capital or low or uncertain tax liability to use credit. Taxable investor could provide part of capital, or lender could sell mortgage and right to claim credit on secondary market.

27. How Would Non-Profits Use the Renters’ Credit? • As with LIHTC, a non-profit could manage development while a for-profit limited partner claims renters’ credit. • A non-profit could pass the credit through to a lender in exchange for a reduction in mortgage payments. • Non-profit lenders could use credits through syndication or partnerships. • If Congress allows a portion of the credits to be monetized, non-profits could receive grants, similar to ARRA TCEP. • These approaches could also work for taxable owners with limited or unpredictable tax liability. • Share of credits could be set-aside for non-profits, as with LIHTC.

28. Cost Comparison: Why is Estimated Cost of Renters’ Credit Less than a Section 8 Voucher? • 3 major differences in the credit calculation: • Exclusion of tenant-paid utilities • If states have option to include utilities and exercise it, cost would be about 15 percent higher • Cap of 85% of SAFMR • If families moved to higher rent areas costs would be higher • No deductions from gross income • Formula used in estimates directs larger share of total funds to lower-cost states than current allocations of vouchers • And no federal payment for administrative costs • Differences from HCV program driven by shift to tax platform, not policy

29. Resources on Renters’ Credit Proposal • Renters’ Credit webpage: http://www.cbpp.org/rentercredit • CBPP report: http://www.cbpp.org/cms/index.cfm?fa=view&id=3802 • Overview Fact sheet: http://www.cbpp.org/files/7-13-12hous-factsheet.pdf • Summary: http://www.cbpp.org/files/renter-credit-key-features-8-30-12.pdf • Project-based credits in LIHTC properties: http://www.cbpp.org/files/RentersCreditWithLIHTC_09-13-12.pdf • Lender-based credits: http://www.cbpp.org/files/renters-credit-lender-short.pdf