How to House the Working Poor
By Peter Dreier
As the nation’s homeownership rate declines—the result of stagnating wages, rising home prices, and the growing number of families still facing foreclosure—poor and middle-class families are competing for scarce rental housing. The nation’s homeownership rate fell to 63.4 percent in the second quarter of 2015, the lowest level since 1967. Almost all rental housing built in the past decade has been high-end luxury units. In 2014, the median rent of newly constructed units was $1,372, about half the median renter’s monthly income. The number of renter households paying over half their income for rent is expected to increase from 11.8 million in 2015 to 13.1 million in 2025.
The number of renter households paying more than 30 percent of their income for housing increased from 14.8 million to 21.3 million between 2001 and 2014. In 2014, almost half of all renters paid more than 30 percent of their income in rent. The number of these households paying more than half of their income for housing jumped from 7.5 million to 11.4 million during that period—an all-time high. More than one in four renters paid over half their income for rent.
This housing/income squeeze is particularly onerous for the poor. In order to afford a modest, two-bedroom apartment, renters need to earn a wage of $19.35 an hour. This “housing wage” is much higher in some areas.
In 2014, 78.6 percent of “extremely low income” working families (defined as households with incomes below 30 percent of the area median income, or AMI) paid more than half their incomes for housing, while 36.5 percent of “very low income” working families (households with 30 to 50 percent of AMI) did so. Together, 54 percent of America’s working poor—7.5 million households—pay over half their incomes for housing, according to the Center for Housing Policy.
There are two ways to solve this problem: 1) raise wages, and 2) provide more subsidized housing to help fill the gap between incomes and rents. In recent years, the federal government has done neither.
But there is a way to address this problem that might be politically practical: add a housing supplement to the popular earned income tax credit (EITC).
The EITC, a wage supplement for the working poor, has become the nation’s most effective antipoverty program. But it has a serious shortcoming. Its benefit levels are the same across the country, even though the cost of living—especially housing—varies dramatically.
For example, according to the U.S. Department of Housing and Urban Development (HUD), the fair-market rent for a two-bedroom apartment is $832 in Memphis and $1,424 in Los Angeles.
Congress should revise EITC’s benefit levels to account for regional differences in housing costs. Cushing Dolbeare, founder of the National Low Income Housing Coalition, proposed this idea in 2001, but it gained little political traction. It is time to give the idea a second look.
In 2015, 27 million working families received about $65 billion in EITC benefits. The average annual benefit was more than $2,400.
The EITC is an entitlement, available to all working-class job holders. In contrast, federal funds to help low-income families pay the rent is disbursed via a waiting list or a lottery. Only 4.8 million households—roughly one-quarter of those eligible for assistance—receive any housing help from HUD. The three major federal housing programs are public housing developments (1.1 million units), privately owned subsidized rental projects (1.2 million units), and housing vouchers (2.2 million). (Another 300,000 low-income households are served by smaller HUD programs.) Together, they represent only 3.5 percent of the nation’s 134 million housing units. They cost roughly $37 billion last year.
The three-quarters of America’s low-income families who receive no government rental subsidies have to fend for themselves in the private housing market. Many pay over half their incomes just to keep a roof over their heads, live in overcrowded or substandard housing, and face a growing wave of evictions and homelessness, as sociologist Matthew Desmond documents in his powerful new book Evicted: Poverty and Profit in the American City.
Politically, it has been extremely difficult for housing advocates to get Congress to maintain, much less increase, the budget for HUD’s subsidized housing programs, despite the growing number of Americans living in poverty and rising housing costs.
But it turns out that the nation’s largest housing assistance agency is not HUD but the Internal Revenue Service—and the beneficiaries are not the poor. In 2014, the federal government provided $130 billion in tax breaks for homeowners—almost three times the size of HUD’s budget. These tax breaks include $68 billion for mortgage interest, $32 million for local property taxes, and $24 billion on the capital gains when these homeowners sell their homes.
These tax breaks primarily benefit the wealthiest Americans with the most expensive homes. The richest 20 percent of households receive 73 percent of the benefits of just the mortgage-interest deduction, worth about $50 billion a year. Low-income homeowners get crumbs: those with incomes between $10,000 and $20,000 get an average of $294 a year in mortgage-interest tax breaks; those earning $20,001 to $30,000 get an average of $447 a year.
In other words, we have long used the tax code to subsidize housing, primarily for the most affluent. Revising the EITC provides another way to use the tax code to subsidize housing—except to target the benefits to those who need it the most.
The EITC has been popular with most Democrats and many Republicans since it was created in 1975. Congress has increased the EITC several times, raising benefit levels and expanding eligibility criteria.
The EITC reduces tax burdens and supplements wages, especially for families with children. It’s a refundable tax credit: workers who qualify for the EITC can get back some or all of the federal income tax that was taken out of their pay during the year, and even get cash back. Workers with incomes below about $39,000 to $53,300—depending on marital status and the number of dependent children—are eligible for the EITC. (Even workers whose earnings are too small to owe income tax can receive it.)
Under the EITC formula for 2015, a single parent with two children who earns $25,000 would receive $4,092. A married couple with a combined income of $40,000 and two children would receive $2,095. Also, workers who have no children and have incomes below roughly $14,800 ($20,300 for a married couple) can receive a small EITC. An employee’s EITC benefit increases with each additional dollar of earnings until reaching the maximum limit. This creates an incentive to leave welfare for work and for low-wage workers to increase their work hours.
In 1986, Congress indexed the EITC for inflation, which it has refused to do for the minimum wage. In 2013, the EITC lifted about 6.2 million people above the poverty line, including about 3.2 million children. In addition, it reduced the severity of poverty for another 21.6 million people, including 7.8 million children.
The EITC is a popular policy tool in part because it comes in through the back door (as a tax break) rather than through the front door (as a direct grant) like food stamps and housing vouchers. Another reason it’s popular is that it rewards people who work, so it does not carry the stigma attached to “welfare.”
An EITC supplement can learn from the experience of the housing choice voucher (HCV) program, which the Nixon administration introduced (then called Section 8) to help families pay for apartments in the private rental market. It now serves 2.2 million households (5.3 million people) at an annual cost of about $19.6 billion.
The vouchers subsidize families’ rent so they don’t pay more than 30 percent of their incomes for housing. Households with vouchers have an average annual income of $13,821. However, few vouchers serve the working poor. Roughly three-quarters of voucher recipients do not work, primarily because they are elderly and/or disabled.
Each year HUD determines fair-market rents—typically rent levels at the 40th and 50th percentile of rents for apartments with one, two, or more bedrooms—in every part of the country. These serve as maximum rents for households with vouchers.
The average monthly rent for voucher recipients is $1,139. Families contribute on average $364 a month toward rent. HUD makes up the difference, an average of $775. Those families lucky enough to win the voucher lottery not only save money on rent, but also live in better apartments in safer neighborhoods.
Congress has been unwilling to increase the number of vouchers to serve all, or even most, families who are eligible for them. Although Republicans designed the program, they and many conservative pundits soon turned against it, arguing with little evidence that it destroyed middle-class neighborhoods by exporting poor families to areas where their presence increased crime.
Compared with housing vouchers, the EITC serves a much wider range of families. If the goal is to reduce rent payments to no more than 30 percent of household income, the subsidy required for most EITC recipients would be significantly less than the typical per-household voucher subsidy.
Like vouchers, the EITC housing supplement could be set at the difference between 30 percent of the household’s income (including the EITC benefit) and the local fair-market rent. This would tie the benefit to a family’s earnings as well as its housing costs. If a household’s income is greater than the difference between 30 percent of household income and the local fair-market rent, the family would not quality for the housing supplement. But for those who face a serious income/rent squeeze, the supplement would make a significant difference. But we would still need a voucher program to serve the jobless poor.
Federal housing subsidies are skewed toward the affluent. Adding a housing supplement to the EITC ensure that government subsidies are targeted to working families and the desperately poor who need help the most.
Peter Dreier is the E.P. Clapp Distinguished Professor of Politics and chair of the Urban & Environmental Policy Department at Occidental College in Los Angeles. He is the author or coauthor of five books, including Place Matters: Metropolitics for the 21st Century and The 100 Greatest Americans of the 20th Century: A Social Justice Hall of Fame.