Scholars Mull Framework of Potential Renters’ Tax Credit

The American Bar Association hosted a webinar March 12 to consider how a federal tax break for home renters might function compared to other personal tax benefit programs, exploring different proposals and their limitations.

A tenant-based renters’ tax credit (RTC) could be claimed on individual income tax returns for qualifying renters subject to eligibility requirements. “So, that could be they have high rent paid compared to their income — it could be that they have a low income compared to the fair market rent,” Executive Director and Senior Research Scholar at the Stanford Center on Poverty and Inequality Dr. Sara Kimberlin outlined. “It could just be a renter with low income.”

Such a credit could be made refundable akin to the Child Tax Credit (CTC) or the Earned Income Tax Credit (EITC) so those with low incomes or those without income still benefit, she continued.

Michelle Layser, an associate professor of law at the University of Illinois, broached an alternative RTC provided to landlords as an incentive for providing rent reductions to tenants. She clarified that the purpose of a landlord-side RTC would still be to help renters, which can be done a couple ways.

“[I]in theory, the tax credit could be designed so that any tenant could go out in the market and find any landlord and they could negotiate a rent reduction agreement with that landlord,” Layser explained. “Then, the landlord could claim the tenant for the balance, and if the tenant moved to a new unit, they could just negotiate a new agreement with a new landlord.”

However, she cautioned, this would be difficult to regulate without proper oversight, and “probably wouldn’t work very well” since landlords could “overrepresent the amount of the discount,” let alone the logistical challenges. Instead, tax credits could be allocated to specific landlords who would, if awarded, enter into a rental reduction agreement with a housing agency, similar to project-based housing vouchers, according to Layser.

Ultimately, an RTC is a market intervention, so if the goal is to address high rents that contribute to poverty or homelessness, “then getting unrestricted cash in tenant hands might actually be a more effective policy” with fewer market distortions if the credit functioned like the CTC or EITC rather as a type of reimbursement for rent already paid, Layser concluded. Because tenants pay rent monthly, an RTC should be paid out monthly if “it’s going to be useful at all.”

Kimberlin agreed that the advanced CTC monthly payments that were issued during the second half of 2021 as a COVID-relief measure is something worth building upon. In approaching the design of an RTC, policymakers should bear in mind that although there would be considerable overlap with those who claim the CTC or EITC, the overlap isn’t “perfect.”

“There are also many renters who are not eligible for those other tax credits” and expanding existing regimes “is not going to reach everyone who is struggling to pay their rent,” said Kimberlin. “Thinking about the role that these credits are playing in helping people afford their rent is also important.”