Two Ideas for Harnessing Tax Reform to Affordable Housing Expansion

The Presidential campaigns primed us (again) for comprehensive tax reform. And now it’s reportedly on the table as negotiators try to forge a “grand bargain” that will pull us back from the so-called fiscal cliff.

Some key differences between Republicans and Democrats, as you undoubtedly know. But cross-party agreement on broadening the base — an oblique term for getting rid of tax breaks.

As I’ve mentioned before, the second largest tax break for individual filers is the home mortgage interest deduction. It cost the federal government an estimated $140.5 billion last year alone.

Chances Congress will get rid of this homeownership preference altogether are somewhere close to zero, I think.

But two organizations have ideas for changing it to address the affordable housing needs of low and moderate-income people.

Creating a Revenue Stream for the National Housing Trust Fund

The National Low-Income Housing Coalition would convert the mortgage interest deduction to a tax credit — thus making it available to all homeowners instead of only those who itemize.

The Coalition would also drop the cap on the mortgage value subject to the benefit from $1 million to $500,000. Same for the interest paid on home equity loans.

These changes, it says, would save the federal government at least $20 billion a year — maybe as much as $40 billion.

NLIHC wants at least some of the savings — actually additional revenues collected — to provide a funding stream for the National Housing Trust Fund.

Brief summary of my earlier post on why that’s needed.

Congress created the Trust Fund in 2008 to provide federal financial support for affordable housing construction and preservation — mainly rental housing that extremely low-income households can afford, i.e., those with incomes no greater than 30% of the median for their area.

To finance the Fund, Congress allocated a percent of the value of new business generated by Fannie Mae and Freddie Mac.

Then the housing bubble burst. The agency that regulates Fannie and Freddie effectively declared itself their legal guardian because the risky loans they’d made put them at risk of insolvency.

And it told them to indefinitely suspend what, in ordinary times, they would have contributed to the Trust Fund.

So the Fund has remained one of those good ideas on paper only.

The NLIHC proposal is the latest of several to put some money into it — and so far as I know, the only one that would give it an ongoing revenue stream.

Creating a Renters’ Credit

The Center on Budget and Policy Priorities also begins with a revenue-raising conversion of the mortgage interest deduction to a tax credit.

In its proposal, some share of the savings would go to states in the form of tax credits they would then distribute to reduce rental costs for low-income families — mainly those classified as extremely low-income.

The credits would work somewhat like housing vouchers, though the way they’d compensate rental housing owners is different.

They’d generally ensure that beneficiaries paid no more than 30% of their income for rent — the usual standard for affordability. And state agencies administering the credits could do this in several different ways.

They could give the credits — or some of the credits — directly to renters, who’d then find suitable apartments (and willing owners).

The owners would then claim the credits on their tax returns, based on the difference between what the tenants paid and the units’ market rates.

Or they could pass the credits through to their mortgage holders, who’d claim the credits and lower mortgage payments accordingly. This, of course, only if the mortgage holders agree to such an arrangement.

States could also allocate some credits to specific affordable housing projects. In this case also, the owners would claim the credits or pass them through.

Finally, states could allocate credits directly to financial institutions, with the understanding that they’d reduce mortgage payments for owners who agree to rent at affordable rates.

If, as the Center suggests, the total cost of the credits were capped at $5 billion a year, about 1.2 million more very low-income renter households would have affordable places to live.

And the number who are now paying at least half their income for rent would be cut in half. An estimated 700,000 low-income families would no longer have to choose between a roof over their heads and other basic needs.

Like the NLIHC proposal, the Center’s is an innovative approach to our nationwide affordable housing problem — and the disproportionate financial assistance our system now provides to homeowners in the top fifth of the income scale.

As Will Fischer at the Center notes, Congress doesn’t have to choose one or the other. The two could work nicely together.

And with a proper cap on the mortgage interest tax credit, there’d still be money left over to help reduce the deficit that’s apparently top-of-mind for our federal policymakers.

Medicaid Block Grant Not The Only Threat To Health Care For Low-Income People

Economist Jared Bernstein reminds us that cost shifting is not cost saving — this in connection with Congressman Paul Ryan’s plan to convert Medicare to a voucher system.

I wonder whether the President and his White House advisors have their minds around this obvious fact — or frankly, how much they care.

What’s got me wondering is a new brief from the Center on Budget and Policy Priorities that takes us through the complexities of a proposal for Medicaid savings that the White House has offered up as part of its deficit reduction plan.

It’s called a blended rate because what it would do is create a single rate for the federal match that each state gets to help cover the costs of insuring low-income adults and children under Medicaid and CHIP (the Children’s Health Insurance Program).

Basically, the federal government now pays a fixed percentage of states’ regular Medicaid costs and a higher percentage for their costs of insuring children enrolled in CHIP.

Under the Affordable Care Act, it will initially pick up the full costs of ensuring people who become newly eligible in 2014, when the minimum federal income cut-off rises in 2014 and childless adults gain a right to coverage. It will then cover somewhat lower percentages, bottoming out at 90% in 2020.

States that expanded Medicaid coverage to childless adults before the ACA was passed will still get a match for them, even though they’re not newly eligible. This match phases in, reaching 100% in 2020.

In short, we’ve got a mix of matching rates — some higher than others. The blended rate would replace them with a single match. Which may sound okay until we learn that states would get significantly less than they would under current law.

Back in April, the White House issued its overall framework for deficit reduction. Savings from Medicaid totaled $100 billion over the first 10 years. CBPP President Robert Greenstein says that as much as $65 billion would have to come from the blended rate.

States would apparently realize some modest savings in administrative costs. But they’d be stuck with the rest of the loss from the replacement of their current and prospective matching rates.

This doesn’t mean they’d make up the difference out of their own revenues. Anyone who wonders what they’d do need only look at what they’ve already done to reduce their Medicaid costs.

They’d cut payments to health care providers, though current reimbursement rates are already so low that many physicians, particularly specialists won’t treat Medicaid participants.

They’d scale back benefits they don’t have to provide to get federal funds, e.g., dental care, eyeglasses and hearing aids, home health services, organ transplants (!).

The President apparently opposes the House Republicans’ Medicaid block grant proposal. “Not on the table” in the deficit reduction talks, says his top Medicare-Medicaid administrator.

But the impacts of the blended rate could be much the same, though probably less drastic.

The federal government would spend less, but not by reducing the costs of providing the health care that low-income people need. It would save by dumping a bigger portion of the rising costs on the states.

The states would then try to minimize the shifted costs. They too would probably rely more on cuts than on genuine cost-reduction strategies, e.g., better quality control, coordination and preventive care.

Ultimately low-income people, including children, would pay — with their health, in some cases their lives — to reduce the federal deficit.

This, I trust, is not what the President had in mind when he embraced “shared responsibility and shared sacrifice.”

NOTE: This posting and my recent cross-posting from Laura’s Life are part of  a Medicaid blog-a-thon organized by MomsRising — a virtual grassroots community that acts on issues that affect mothers and families.

UPDATE: MomsRising now has an online listing of all the blog-a-thon postings, with links. You can find it here. More member Medicaid stories are available in a story map.

Widely-Reported Flat Poverty Rate May Be Deceptive

A New York Times editorial cites one of the Census Bureau’s alternative poverty estimates as evidence that “the safety net, fortified by stimulus” kept the number of people in poverty from rising in 2009.

For this, it relies on an analysis by the Center on Budget and Policy Priorities — the same one I used to arrive at a similar, though more cautious conclusion.

“Sorry,” says Shawn Fremstad, Director of the Inclusive and Sustainable Economy Initiative at the Center for Economic and Policy Research. “Poverty really did increase in 2009.”

True, the expanded food stamp benefits and tax credits that were part of the economic recovery act may have kept poverty from increasing as much as it would have otherwise. But they didn’t offset the impacts of massive job losses and related losses of health insurance.

According to Fremstad, the alternative poverty rate didn’t go up in part because the alternative poverty threshold that produced the no-increase result went down. This, he says, was also true for the threshold used to produce the official poverty rate, but the decline was smaller — slightly over a third of a percent, as compared to 1%.

The gap reflects differences in the data sets Census uses to establish the thresholds.

As I’ve written before, the official threshold is set at three times the early 1960′s cost of the U.S. Department of Agriculture’s Economy Food Plan, adjusted for inflation. The alternative threshold at issue is instead tied to the amount that moderate-income households spend on housing, utilities and food.

When the housing market tanks, as it certainly has, the alternative threshold won’t keep up with the overall inflation rate — even actually decline, as it did in 2009. This could boost some people above the cut-off, though they were as income-poor as those who fell below it were in 2008.

But if their housing costs were actually lower, wouldn’t their resources come closer to covering their basic needs? For the purposes of the poverty measure, that depends on what counts as a basic need.

Which brings us to Fremstad’s second point. The no-increase alternative measure doesn’t fully account for medical costs. Instead, it adjusts only for out-of-pocket medical expenditures, e.g., deductibles and co-pays.

Sounds reasonable enough until you consider what can happen when people lose health insurance, as 4.4 million did in 2009.

Some will be well enough off to pay for essential health care costs, notwithstanding the bigger drain on their resources.They’ll seem to be poorer because the measure picks up their costs.  Others will forgo care. They’ll seem to be relatively better off, though they could well be poorer than those who continue to pay for care.

Fremstad says the Census Bureau actually did publish some alternative poverty measures that include medical expenses, rather than just out-of-pockets. These produced higher thresholds than in 2008 and somewhere between 1.1 million and 1.8 million more people in poverty.

Still less than the 3.74 million in the official estimate, but enough to suggest that the poverty rate didn’t stay flat — if the test is whether people could afford essential expenditures.

Lastly, Fremstad notes that the Census Bureau counted the full value of refundable tax credits as 2009 income, even though “nearly all” the families who gained from the expanded Earned Income Tax Credit and Child Tax Credit got their benefits as a lump sum in 2010, i.e., after they filed their 2009 tax returns.

So they were no less poor in 2009 than they would have been with no refunds at all.

None of this is to say that CBPP erred in finding that major safety net programs, including the expansions effected by the recovery act, kept some millions of people out of poverty. Nor that the Times is wrong in saying that Congress should “take a good look at those numbers … before it commits to any more slashing and burning.”

But it does, I think, show how urgently we need a single, reliable poverty measure to tell us how many poor people there are — and who they are — at any given time and over time.

As the Times editorial indicates, this is not just of interest to economists and others of a wonkish bent. It’s got real world consequences for policymaking and for a still-unknown number of poor people affected by the policies made.

Deficit Double-Talk

About 10 years ago, arch-conservative Grover Norquist revealed the impetus behind the Bush tax cuts. “My goal,” he said, “is to cut government … down to the size where we can drag it into the bathroom and drown it in the bathtub.

I cite this fine display of candor because it’s notably absent from what Congressional Republicans are saying now. But it’s nonetheless applicable to the course they claim reflects the will of the American voters

First, they adamantly insist that all the Bush tax cuts must be extended. Also that even more wealth must be exempted from the estate tax. These measures, of course, increase the deficit — though the “middle class” tax cut extensions the President also wanted made up the largest part of the impact.

Then the Republican-controlled House adopts new rules that will exempt further tax cuts from budget discipline. At the same time, it subjects all spending increases to new constraints, requiring that they be offset only by spending cuts.

A good way to “cut the government down to size,” but no way to reduce the deficit.

The House Republican leadership also reaffirms its pledge to roll back federal spending to the pre-Recovery Act level. At this point, that  would seem to entail $60 billion in immediate cuts, plus an additional $40 billion beginning in October — assuming Congress passes a Fiscal Year 2012 budget on time.

Not good enough, says the Republican Study Committee, representing a majority of Republican House members. We want discretionary spending, i.e., the spending Congress annually approves, rolled back to the 2006 level and frozen there until 2021. Except for Defense — the single biggest chunk of discretionary spending.

The Center on Budget and Policy Priorities reports that the RSC plan would ultimately cut non-defense appropriations 42% below what the Congressional Budget Office says would be needed to maintain the Fiscal Year 2010 funding level, with adjustments for inflation.

No way this much could be cut without decimating key government programs — especially because it’s a sure bet that not all programs would get hit with that 42%.

Such drastic spending cuts aren’t needed to address the long-term deficit. Nor would they do so. As this nifty interactive pie chart shows, all non-defense discretionary spending accounted for just 15% of the Fiscal Year 2010 budget.

Nearly 60% was mandatory spending, i.e., spending that Congress doesn’t vote on each year. And nearly 70% of that was for Social Security, Medicare and Medicaid.

Enter Congressman Paul Ryan’s Roadmap for America’s Future. As the Economic Policy Institute explains, the Roadmap aims to “dismantle Medicare and Medicaid,” replacing them with vouchers that would increasingly fall short of health care costs.

Also cut Social Security benefits while partially privatizing the system. This, says EPI, would mainly benefit wealthier Americans, who would also gain from drastic shifts in the tax burden — so drastic that millionaires would pay taxes at lower rates than middle-class families.

Death knell for what’s historically been our progressive federal income tax system.

These are not deficit-driven conservative proposals. They’re as revolutionary as the Tea Party’s name. Because they would radically define what we the people — well, most of us people — have come to understand as the federal government’s responsibility “to promote the general Welfare.”

The depth of the cuts, combined with the re-engineering of social insurance programs would shift that responsibility to state and local governments. But they have neither the resources nor the budgetary flexibility to assume it — even if they want to. And current evidence suggests some don’t.

Bottom line is that the House Republican majority, seconded by Republican leaders in the Senate, would roll up the safety net and roll back the clock to the nineteenth century, when poverty, education, public health and the like just weren’t any of the federal government’s business.