Center on Budget and Policy Priorities

cbpp.org1

Proposal for a New Federal Renters’ Tax

Credit October 9, 2013

Barbara Sard and Will FischerCenter on Budget and Policy Priorities

Center on Budget and Policy Priorities

cbpp.org

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.

Center on Budget and Policy Priorities

cbpp.org

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.

Center on Budget and Policy Priorities

cbpp.org4

FEDERAL HOUSING SPENDING IS UNBALANCED

Center on Budget and Policy Priorities

cbpp.org

Center on Budget and Policy Priorities

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

Center on Budget and Policy Priorities

cbpp.org

Three-Quarters of Federal Housing Expenditures Benefit Homeowners

Center on Budget and Policy Priorities

cbpp.org

Federal Housing Expenditures Poorly Matched to Need

Center on Budget and Policy Priorities

cbpp.org

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

Households

Center on Budget and Policy Priorities

cbpp.org9

Rental Affordability Problems Are Getting Worse

Center on Budget and Policy Priorities

cbpp.org

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

Center on Budget and Policy Priorities

cbpp.org

HUD Rental Assistance Has Remained Flat Despite Increase in Need

Center on Budget and Policy Priorities

cbpp.org12

HOW WOULD A RENTERS’ CREDIT WORK?

Center on Budget and Policy Priorities

cbpp.org

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

Center on Budget and Policy Priorities

cbpp.org

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).

Center on Budget and Policy Priorities

cbpp.org15

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.

States Could Use Credit to Achieve Key Policy Goals

Center on Budget and Policy Priorities

cbpp.org

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.

Center on Budget and Policy Priorities

cbpp.org

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.

Center on Budget and Policy Priorities

cbpp.org

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

Center on Budget and Policy Priorities

cbpp.org

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

Center on Budget and Policy Priorities

cbpp.org

Calculating the Monthly Renters’ Credit for a Sample Family With a Monthly Income of $1,500 Paying $900 a Month in Rent

Impact on Family Impact on Owner

$900 Rent $400 Rent Reduction to Family

— $850

Market-Based Rent Cap (85% of HUD FMR for Zip Code or Non-Metropolitan County)

x 105% Credit Percentage

$50Excess Rent Paid by Family after applying the Market-Based Rent Cap

$420 Credit to Owner

+ $450Family Income-Based Rent Payment (30% of $1500)

$500 Total Family Rent Payment

Total Rent Reduction for Family: $400

Tax Benefit to Owner: $420

Sample Credit Calculations

Center on Budget and Policy Priorities

cbpp.org

Center on Budget and Policy Priorities

Distribution of Credits

Center on Budget and Policy Priorities

cbpp.org

Center on Budget and Policy Priorities

Tenant-based Credits

Center on Budget and Policy Priorities

cbpp.org

Center on Budget and Policy Priorities

Project-based Credits

Center on Budget and Policy Priorities

cbpp.org24

Project-based Assistance in LIHTC Property• 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.

Center on Budget and Policy Priorities

cbpp.org

Center on Budget and Policy Priorities

Lender-based Credits

Center on Budget and Policy Priorities

cbpp.org26

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.

Center on Budget and Policy Priorities

cbpp.org

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.

Center on Budget and Policy Priorities

cbpp.org

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

Center on Budget and Policy Priorities

cbpp.org

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