Report

The Earned Income Tax Credit as an Instrument of Housing Policy

Michael A. Stegman, Roberto Quercia and Walter R. Davis

Executive Summary

High housing costs present by far the most formidable barrier to safe, decent and affordable housing, vastly outweighing substandard or overcrowded conditions. Frequently these high costs frustrate efforts to bolster working families and ease the transition from welfare-to-work.

And yet, housing costs—the biggest chunk of a working family’s budget—have received short shrift in efforts to smooth the transition from welfare to work and to provide additional support to families who are working but earning low wages.

The federal Earned Income Tax Credit (EITC), designed to aid low-income working families and individuals, already plays a role beyond that of an income support. In an era of declining availability of affordable housing, the EITC provides significant relief to households burdened by severe housing costs that consume at least 50 percent of gross income.

Adding to the importance of this relief is the lackluster supply of federal housing aid: Less than one in four qualified households actually receives housing assistance administered by the U.S. Department of Housing and Urban Development, such as Section 8 vouchers.

This paper examines the effect of the EITC on housing-cost burdens currently and analyzes and contrasts three proposals to increase its impact as a housing tool.

    In the course of the discussion, the paper finds that:

  • By any measure, severe housing expenses for low- and moderate-income households are on the rise. Double-digit increases have been the norm in recent years for a number of metrics, even at the close of the prosperous 1990s.

  • If included in income, the EITC significantly reduces critical housing needs for working households. Currently, the EITC reduces the number of households that bear severe housing costs by 18 percent. Because housing affordability is calculated on a gross income basis, these benefits are often overlooked. Even with no change in the credit, efforts to increase participation in the EITC among eligible tax filers could yield meaningful reductions in housing-cost burdens.

  • All three proposals to expand and restructure the EITC would reduce the number of households with severe housing costs. A proposal introduced in Congress in 2001 would increase the EITC for childless workers and for families with three or more children, thereby eliminating severe housing-cost burdens for 153,000 households.

  • The authors’ proposal would relieve severe housing-cost burdens for 510,000 families. Configuring EITC parameters to help renters afford typically-priced units in most major metropolitan markets would assist families with children most significantly. Like the other proposals, it would also remove a large number of families from poverty.

Overall, expanding the EITC in some fashion would be an effective way to improve housing affordability for millions of working families. Moreover, using the EITC as a housing tool specifically incorporates a work incentive into the assistance. For the private sector, expanded use of the EITC does not increase hiring costs, unlike “living wage” ordinances enacted at the local level.

Despite the prosperity of the 1990s, housing became less affordable for millions of working families. Federal assistance did not increase to meet the need. Indeed, current housing programs may be unable to accommodate the increasing demand. Incorporating an implicit housing benefit into the EITC would begin to reduce the shortfall substantially.

More