In the Democratic presidential primary, housing policy has become much more prominent as an issue than it has been before nationally.
That’s a good thing. Rising housing costs hurt the American economy, by making highly-productive areas of the country less accessible, especially for lower-income workers, and by raising the cost of living, they slow down real wage growth.
However, the plans proposed by Democratic candidates are a mixed bag. The root cause of high housing costs in many urban areas is zoning and land use regulation. These regulations limit the building of new housing, especially large apartment buildings, reducing the supply of housing in urban centers, thus leading to higher prices.
While those laws are determined locally, the federal government could take some steps to encourage relaxing them. Senators Cory Booker and Elizabeth Warren, along with former Housing and Urban Development Secretary Julian Castro, have proposals to create incentives for cities to relax zoning and land use regulations. But many of the Democrats’ ideas amount to throwing money at the problem, and won’t actually solve the underlying cause of high rents and home prices.
The first example is Kamala Harris and Cory Booker’s proposal for a tax credit for renters. The tax credit would go to taxpayers earning less than $100,000 who spend over 30 percent of their income on rent. That seems helpful, except for when the supply of housing is close to fixed, as it is in cities with strict zoning and land use regulations, landlords will respond to the subsidies by increasing rents. As a result, this tax credit would end up largely being a $76 billion a year boondoggle for landlords, while only marginally helping most renters.
Julian Castro, meanwhile, has proposed increasing the Low-Income Housing Tax Credit (LIHTC) by $4 billion a year. The LIHTC is a tax credit for developers to build affordable housing predominantly for people earning well below-average incomes, and it costs roughly $9 billion a year right now. There’s a lot of reason to doubt how effective the tax credit actually is in stimulating new housing. Studies from the Congressional Budget Office, the American Enterprise Institute, and the Cato Institute have all noted that a lot of the benefits of the tax credit go to the developers. A paper in the journal Real Estate Economics found that renters receive only one-third of the benefits of the LIHTC.
Contrary to these proposals, there are two main avenues the federal government can and should take to lower housing costs. As I’ve written about for Pursuit before, the first is to abolish the deductions for state and local taxes and mortgage interest. These deductions artificially inflate home values, and incentivize people to use homeownership as a wealth-building tool. As a result, homeowners are more likely to act in support of regulation that protects existing home values at the expense of new affordable housing.
The second is tying strings to federal grant money to incentivize cities to relax their zoning regulations. In other words, cities would have to relax their zoning laws in order to be eligible for certain federal aid programs. Both Republicans and Democrats have suggested versions of this plan. Both Castro and current HUD Secretary Ben Carson, along with Senator Todd Young (R-IN), have proposed tying community development block grant program (CDBG) to some form of zoning and land use reform.
But politicians could be more ambitious. Both Warren and Castro have proposed a lot more spending on public housing, but a more effective idea would be to tie more than just community development block grants to zoning reform. One example would be transportation infrastructure funding. There’s a clear connection between housing and transit policy, as where people live matters a great deal for how efficient a new transit development is. As a result, stipulating that municipalities must relax their zoning laws to allow the construction of a lot of housing near the new infrastructure makes sense.
To people concerned about federalism, these proposals might sound like scary federal overreach. But it makes sense for the federal government to correct the problems inherent in local control of housing policy. Very low participation rates in local government allow established residents, generally wealthy, older homeowners, to wield disproportionate power in housing policy decisionmaking and make policy that enhances their own personal wealth at the expense of everyone else.
While zoning laws are dictated by local governments, the feds can play a role in reducing this regulatory burden. But the federal government doesn’t need to break the bank with hundreds of billions of dollars in new spending either. Instead, on the whole, federal policies that help expand the housing stock and reduce housing prices can even reduce the deficit, by eliminating the SALT and MID deductions while attaching pro-zoning reform strings to existing spending programs.