Could the Federal Tax Code Help Alleviate Housing Burdens?

One-third of renters in the US make less than $30,000 per year, 83 percent are rent burdened, and only a quarter of those eligible for federal housing assistance receive it. Two notable programs address both housing and support households earning lower incomes: the Earned Income Tax Credit (EITC) and the Housing Choice Voucher (HCV) program. The EITC is a refundable tax credit that helps reduce the tax burden on low-to-moderate income families and supplements the wages of working families whose earnings are less than the maximums for their filing status. However, the EITC’s impact is inequitable because the program does not account for geographic variation in cost of living. In contrast, the HCV program determines subsidies using local rents. However, HCV is insufficiently funded (meaning that not all who are eligible get benefits) while the EITC is fully funded for all eligible.

The authors of this study analyze whether a possible combination of these programs could amplify their alignment and address the shortcomings of each. This approach, called EITC-Plus, would use the tax code to subsidize housing, something the US already does when providing tax breaks for homeowners. It would revise EITC benefit levels using the HCV program’s approach of accounting for geographic differences in the cost of living. Under this proposal, a family’s benefits would be the standard refundable tax credit plus a new housing supplement set at the difference between 30 percent of the household’s income and the appropriate local fair market rate.

To assess how this change would affect costs and enrollment, the researchers conducted a cost simulation using EITC eligibility parameters and tax filer data at the metropolitan level for all US metros. The authors calculated these scenarios for a cashier who makes mean annual wage (using data from the Bureau of Labor Statistics) in each metropolitan area and who’s filing single with two children. They estimate the number of filers eligible for EITC benefits within various income bands, which is essentially a measure of program participation, and the additional income each family type receives from the EITC. Finally, they calculate the highest affordable rent payable by a household using 30 percent of its income (inclusive of the EITC) for each income band and family type and compare that value with the metropolitan area’s fair market rent using data from the US Department of Housing and Urban Development. The researchers cost simulate the EITC Plus housing supplement each family would receive by finding the difference between the number of filers eligible for EITC benefits within various income bands and the highest affordable rent price payable by a household using 30 percent of its income. They then sum for all families eligible to receive the EITC benefit and multiply by the participation rate for a total implementation estimate of the housing supplement program for each metropolitan area. They changed program parameters to test how various aspects of a program like this would shift costs.

Key Findings

• Nationally, an EITC Plus housing supplement would have cost $100.75 billion in 2021 under the above parameters. For context, in 2022, the HCV program, which served one-quarter of eligible households, cost $25.7 billion (approximately one-quarter of the estimated EITC Plus cost).
• Feasible ways to reduce costs (that would, however, reduce program benefits) include tying benefits to a rent lower than the free market rent, assuming families will pay 40 percent of their income for housing (rather than 30 percent), basing the supplement on a studio fair market rent instead of a one-bedroom unit for singles with no children, and capping the supplement at the median rent for each metropolitan area.
• The largest cost reduction comes from an EITC Plus model with two variations: setting support at 90 percent of fair market rent and housing share of income at 40 percent.
• The EITC Plus would be easier than the HCV program to implement, as little bureaucracy is required.
• Because housing expenses recur monthly, advance payment of the housing supplement would increase the program’s efficacy and impact.
• To ensure there’s no reduction in benefits, the authors assert that like the current EITC, the housing subsidy should not count as additional income.
• The EITC Plus’s benefits skew heavily toward urban, high-cost areas.

Policy implications

• The authors note that political tractability is one of the strongest advantages of the proposed EITC Plus. The EITC is one of the only federal antipoverty programs that has received consistent bipartisan support and stable (or expanded) funding.
• New programs can face significant political opposition and logistical breakdowns. Because government officials know how to implement both the EITC and HCV independently, the authors assert that effective implementation is more likely.
• Under an “all-or-nothing” supplement rule, workers earning $10 per year would still receive the entire relevant fair market rent as a tax refund. For some members of Congress, this could weaken one of the EITC’s major political advantages (that it’s a work incentive).
• Although the estimated $100.75 billion price tag for the EITC Plus is significant, investments of this scale are not unprecedented. The EITC-Plus (which benefits low-income tenants) should be contextualized alongside the $73 billion spent in 2022 on federal homeowner support (concentrated among the well-off).
• The EITC Plus’s impact is limited to expanding housing choice and access for working low-income families. To serve all families with low incomes, other policies that address the undersupply of affordable housing and that serve people who are not working (including older adults and people with disabilities) are needed.