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June 4, 2019

The 2020 Campaign and Taxes Part 4: Tax Credits for Low Income Housing

Low Income Housing Credits

Previous articles in this series explored how presidential candidates propose to use tax legislation to implement social or economic policy, and to influence the wealth inequality dynamic. Our first article explored one of these proposals that also faces constitutional uncertainty. But tax increases are not the only way the Democratic candidates are addressing the gap. Senators Kamala Harris (D-CA) and Cory Booker (D-NY), who are both candidates for President, are eyeing plans for large tax credits to assist low-income individuals and families. Both of these plans are fundamentally different than proposals from other candidates.

Equivalence to Spending Plans

Both candidates’ plans would create tax credits for housing and would expand the current earned income tax credit (EITC). These are tantamount to spending plans in that they utilize refundable tax credits to achieve their objectives without revenue offsets. A refundable tax credit is paid to the taxpayer even if the taxpayer does not have a corresponding tax liability. In other words, refundable federal tax credits are the same as a direct federal payments to these taxpayers, and are essentially the same as direct federal spending for federal budgetary purposes. So why not just implement a true spending program?

Direct spending programs have to be funded through appropriations legislation, and Congress has repeatedly clashed over spending for many years. In fact, these clashes have resulted in multiple government shut downs over the last decade. Refundable tax credit programs have different optics (if not different effects) on the legislative process, so tax credit proposals are positioned to avoid these contentious funding battles. Once a refundable tax credit is enacted, it does not have to be funded through annual appropriations legislation, which is a major difference from a spending program. But it provides for an equivalent effect on government finances.

Details for Similar Programs

Although the proposals are multi-faceted, we will focus on the candidates’ housing proposals. These proposals would not be the first time refundable tax credits have been offered to individuals to offset housing costs. But specifically for low income housing, refundable tax credits for individuals offer a new approach to address social policy, as previous low income housing tax credits have gone to the developers who build the housing. These proposals also differ from other federal spending programs that subsidize housing for low income taxpayers, and these differences make the current proposals unique.

The current federal housing program is the Housing Choice Voucher Program, but it is more commonly referred to as Section 8 housing. Upon application to this program, families whose income does not exceed 50% of the median income for the county or metropolitan area of residence are certified as eligible. An eligible family will likely face a waitlist, and those whose income does not exceed 30% of the median income are given preference. Families ultimately must find a suitable residence to lease, and must pay at least 30% of their monthly adjusted gross income to the rent and utilities at that residence. Housing vouchers are then provided to cover certain expenditures that exceed this level and rent that exceeds a 40% level. The landlord, the local public housing agency, and the family must all sign the lease. This lease requires the landlord to provide housing that meets certain quality standards, and is often cited as the primary barrier to landlord participation in the program.

All of this adds up to a program that is dependent on government funding appropriations, which are part of the contentious budget process discussed previously, and on a landlord’s willingness to accept low income taxpayers as tenants that are subject to the required housing quality standards. The candidates see these obstacles as contributing to a housing crisis, which their proposals attempt to address.

Details for Each of the Refundable Tax Credit Proposals

The proposals from Senators Harris and Booker would likely come with a much higher price tag than the costs of the previous programs. First, by bypassing the appropriations process, the programs would not face spending caps unless limitations are placed on the overall credit amount. Second, the programs would expand the pool of eligible recipients. Under Senator Harris’s plan, the Rent Relief Act, the credit would generally equal the difference between 30% of a recipient’s income and the recipient’s amount of rent, and would be capped at 150% of fair market rent. A qualifying low-income taxpayer must have earnings below $100,000 annually (or $125,000 for certain eligible areas). But the credit would be phased out slowly for taxpayers whose income was above $25,000. For example, a taxpayer whose income was $60,000 would generally receive half of the full credit amount. Taxpayers in the Section 8 program would receive a separate tax credit equal to 1 month’s rent.

Eligibility for Senator Booker’s plan, the Housing, Opportunity Mobility, and Equity (HOME) Act, would be much more dependent on the taxpayer’s area of residence. Mr. Booker’s program would be open to taxpayers whose income does not exceed 80% of the area median income. Nationwide the median income is about $59,000, so for much of the country the threshold would be much lower than the $100,000 maximum proposed by Ms. Harris. On the other hand, Mr. Booker’s tax credit does not have a phase-out, so all taxpayers who were eligible would receive the full tax credit. However, the full credit amount would be potentially lower under Mr. Booker’s plan. Mr. Booker’s tax credit would be the difference between 30% of the taxpayer’s income and 100% of fair market rent. Section 8 housing recipients would be eligible for Mr. Booker’s program if their rent was in the window that is between 30% and 40% of their income (as previously discussed). Also under Mr. Booker’s proposal, taxpayers could delay receipt of their credit for 180 days and earn interest on the credit amount during that time.

Summary

These refundable tax credit proposals would increase the cost to the federal government without revenue offsets; however, even tax bills have revenue hurdles to cross.  These offsets, as well as the candidates’ plans to expand the EITC will be explored in an upcoming installment. In the meantime, for more information on the 2020 candidates’ tax plans and other tax related issues, please contact your local CBIZ tax professional.

2019 Business Tax Planning Supplement


Copyright © 2019, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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