Research Findings

Could expanding the Earned Income Tax Credit help fix the housing crisis?

November 7, 2019

Access to stable housing is critical to the wellbeing of individuals and families. As rents have risen and wages have not kept pace, finding affordable housing in the U.S. has gotten harder. This is especially true for low-income families, who often spend more than half their income on rent.

The U.S. has a number of housing policies, like Housing Choice Vouchers, to help low-income families find and afford housing, but only about 25% of eligible households get assistance. Housing vouchers can also be challenging to use when landlords refuse to accept them. This led us to consider whether a different policy – the Earned Income Tax Credit (EITC) – might help improve families’ housing situations. We wanted to know whether making the EITC more generous for low-income families might be another way to address the housing affordability crisis.

What is the EITC?

The EITC is a refundable tax credit targeted to low-income working parents. Tax credits reduce your tax burden, but a refundable tax credit, like the EITC means that even if you don’t owe taxes you can still get money back as part of a refund. The average EITC refund for a family with children is more than $3,000. The credit itself can be worth up to 45% of a low-income family’s take-home earnings, which means it can be a huge share of a family’s total income for the year.

The EITC was created in 1975, originally as a temporary tax credit to help low-income parents during an economic recession. The credit was made permanent in 1978, and has been expanded many times since. Over the years the credit has been expanded for families with two and then three kids. Today there is also a credit for low-wage adults without children, although it is much smaller than the one available for families with children.

Twenty-nine states, Puerto Rico and Washington D.C. also have enacted state level EITCs and they vary greatly in their generosity. Most structure their credit as a percent of the federal EITC – ranging from about 3% to 45%. Some states, like Rhode Island and Vermont, started their EITCs in the late 1980s, whereas others like California only implemented policies in the last 5 years.

The EITC is one of the largest cash transfer programs in the U.S. About 26 million families get the EITC each year. And many studies have shown it is effective at improving families’ economic wellbeing: increasing employment, reducing poverty, and improving earnings. But no research had considered whether the EITC improves housing or affects living arrangements.

Our study focused on low-income unmarried mothers, those who are most likely to get the EITC (although married parents are also eligible). Using data from the Current Population Survey, the American Community Survey and the Fragile Families and Child Wellbeing Study, that covered the time frame 1990-2016, we studied the effects of the EITC on housing among low-income families.

To get at the effects of the EITC on low-income families, we took advantage of the many federal and state expansions to the EITC that occurred between 1990 and 2016. For example, in 1993 the federal EITC became more generous for families with two children. By comparing similar mothers before and after the expansion (say an unmarried mother with two children in NY in 1992 to an unmarried mother with two children in NY in 1994) – we can assess the effects of the EITC on housing.

Did the EITC help with housing?

Yes and no. First, the EITC did help make housing more affordable. We found that getting an additional $1,000 of EITC reduced the share of earnings a mother paid on rent.

Second, mothers who got larger EITCs moved out of shared living arrangements – where they were living with other adults who were not their partner, sometimes referred to as “doubling up”. We found that in particular, mothers who got larger EITCs were more likely to move out of someone else’s home (rather than someone moving out of their home) and were likely especially likely to move out of multigenerational households.

The EITC also meant that mothers were more likely to be living in a home where they were named on the lease or mortgage. Living in your own home, rather than in someone else’s home (where they may decide you’re no longer welcome), is generally considered to be more stable. And many studies show stability, broadly defined, is good for kids.

Third, because many of these mothers were no longer doubled up, they were also less likely to live in a crowded household. Less crowded households have also been linked with better outcomes for children.

However, our study also found that expanding the EITC is unlikely to address the most extreme types of housing instability – homelessness or eviction. To get the EITC, a person must be working. Families who face homelessness or get evicted are more likely to be unemployed. And even if they are employed, the credit itself may not be sufficient to overcome something as severe as the threat of eviction or homelessness. Thus, increasing the EITC won’t necessarily fix this important housing issue.

Nonetheless, even if the EITC can’t address homelessness or evictions, expansions seem to have helped mothers afford their housing, live in less crowded situations, and live in homes they rent or own.

What does this mean for policy?

Overall our study suggests that expanding the EITC might be an effective way to combat some pressing housing issues. The EITC is a relatively popular policy. It targets working families, reduces taxes, and appears to be effective at reducing poverty and increasing household income. This is likely why a number of politicians, policy advocates, and researchers have called for more expansions to the EITC.

Although these proposals to expand the EITC focus on improving families’ economic wellbeing, many of the Democratic nominees for president have been discussing housing policy and in particular, housing affordability. Our study suggests expanding the EITC might be an effective way to do both – target economic wellbeing and improve the housing of low-income families.

Read more

Natasha Pilkauskas and Katherine Michelmore, “The Effect of the Earned Income Tax Credit on Housing and Living Arrangements,” Demography 2019.

Image: denisbin via Flickr (CC BY-NC 2.0)

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