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Remember Evicted, Matthew Desmond’s harrowing account of the housing travails of low-income families in Milwaukee? Undoubtedly senators (and presidential hopefuls) Cory Booker and Kamala Harris remember the powerful story of families that struggle to find, and keep, affordable housing.
Last summer, Booker and Harris separately introduced legislation to provide housing assistance to lower-income families. The feature that distinguishes their plans from the current federal rental assistance programs is a refundable tax credit paid directly to the renter. (Desmond endorsed Harris’s plan when it was introduced last summer, a few weeks before Booker’s bill.)
When researchers at Columbia University recently analyzed five different anti-poverty tax plans proposed by Democratic senators (including a work credit also proposed by Harris), they found Booker's and Harris’s rent credits to be the most cost-effective approach to reduce poverty.
However, neither Booker nor Harris spell out key details about how their proposed rent credits would be administered by the IRS. Setting aside the incidence issues raised by subsidies for housing (and those are important!), how tax credits are delivered matters. That old adage—timing is everything—applies with particular force to renters’ credits. Unless the federal government can deliver those credits when the rent is due, many people may not claim the subsidy and fewer will be lifted from poverty.
That is not to say that refundable tax credits are without merit. Relative to other types of cash assistance programs, the refundable earned income tax credit (EITC) is easier to claim, less costly to administer, and—because the payments look exactly like the refund checks received by millions of taxpayers—far less stigmatizing. Those factors likely contribute to the credit’s high participation rate.
There is political appeal too. Refundable tax credits can be presented to voters as tax cuts rather than as less-popular spending programs (even though some of its costs are scored by the Congressional Budget Office as outlays). And the refundable EITC, being based on labor earnings, can be characterized as a pro-work tax incentive.
But refundable tax credits raise administrative concerns—most of which relate to verifying eligibility. While Congress has strengthened the IRS’s ability to confirm some aspects of eligibility (such as wages) before it pays the EITC, the Office of Management and Budget still designates the credit as a high-risk program due to the large amount of improper payments.
And then there is the issue of timing under current law. Refundable tax credits, like other individual tax benefits, are generally based on annual amounts and claimed when returns are filed the following spring.
Attempts to speed the payment of refundable tax credits have met with mixed results. For 31 years, workers could opt to receive the EITC in their paychecks, but very few—with estimates ranging from 0.5 to 3 percent—of credit claimants taking advantage of that option despite repeated efforts by the IRS to heighten awareness. Congress finally gave up on advance EITC payments and repealed the feature in 2010.
In that same year, however, Congress enacted the Affordable Care Act, which provides refundable tax credits for health insurance. Like rent, insurance premiums must be paid before the person receives the good or service. In an effort to better time the payments, Congress set up a much more elaborate system for paying premium tax credits. Credits can be determined and validated at the time someone buys insurance through a health insurance exchange and then applied to premiums as soon as they are billed. Essentially, those tax credits are paid directly to the insurer on behalf of the insured individual.
But to make sure the credits are delivered in a timely way, Congress created a complicated mechanism for setting and verifying the amount of the payment. Though health insurance credits ultimately are based on current needs, the credit paid is based on the most recent information available to IRS—generally the income earned two years before the insurance kicks in. Later, the credit amount is adjusted to reflect recipients’ actual income during the coverage year. Thus, someone may have to return a portion of their credit if their actual income exceeds the estimate based on their past income.
Can Congress create a similar apparatus for refundable rent credits that balance concerns about overpayments with families’ immediate needs? And should those credits be paid to renters or landlords? Such a system probably requires an intermediary agency—other than the already overstressed IRS—that can verify recipients’ eligibility and deliver the credits during the year. The challenge, however, is to create that system without making it very difficult to apply for benefits or very costly to administer. If Congress wants to help struggling families afford adequate housing via a new tax credit for renters, it must develop an effective delivery system for those payments.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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