Proposed changes to a tax credit aimed at increasing America’s housing supply could be key to Democratic presidential nominee Kamala Harris’s plan to boost first-time homeownership.
As part of the economic agenda she unveiled August 16, which includes increases to the child tax credit, Vice President Harris is seeking to provide incentives to first-time homebuyers in the form of credits worth up to $10,000, as well as down payment assistance worth up to $25,000.
However, given the nationwide housing shortage, policy observers believe the success of Harris’s plan hinges on the effectiveness of her other proposals to increase home construction, including an expansion of the low-income housing tax credit (LIHTC) and additional tax incentives for builders to produce more “starter homes.”
“The concern is that with the [homebuyer] tax credit . . . all you’re doing is pushing up the demand for housing, which is actually going to increase prices,” Garrett Watson of the Tax Foundation said in an interview. “Without fixing the supply issue first, the rest could actually be counterproductive.”
While Watson believes the expansion of the LIHTC could help supply-side issues, he pointed out that the federal government isn’t the only one with a say in housing policy.
“It’s hard to put pressure on state and local localities to change nontax barriers — zoning, land use, other issues — that limit how things are built,” Watson said.
One industry group also alluded to the need for cooperation between the federal and local governments.
“A tax credit to help builders construct more entry-level housing and expanding and strengthening the Low-Income Housing Tax Credit will help builders to construct badly needed new homes and apartments,” Carl Harris, chair of the National Association of Home Builders, said in a release. “But any tax incentive to support the production of starter homes must be targeted to local market conditions and be widely available.”
Carl Harris (no relation to the vice president) added that while the tax credit and down payment assistance for homebuyers are “positive demand incentives,” the success of the plan would ultimately come down to reducing the housing shortage.
Owen Zidar, a professor of economics and public affairs at Princeton University, said Harris’s focus on affordable housing incentives as a way to combat the housing gap is the right move.
“The LIHTC is imperfect but aimed at the right problem,” Zidar said.
While he lamented how the benefits of the program are heavily skewed toward developers, Zidar argued that “the campaign’s other tax reforms aimed at high-income individuals will offset some of these gains to developers.”
According to data from real estate marketplace Zillow, as of June the United States had a housing deficit of 4.5 million homes — a factor it cited as the main determinant of a lack of affordable homes.