A Well Targeted Federal Renter Credit Could Help Reduce Wealth Gaps

While lawmakers often speak about income inequality, less attention is paid to wealth inequality. Wealth is distributed even more unequally than income in the U.S. in ways that reinforce racial divides, leave some households with too little to handle unexpected expenses, and enable some households to pass down enormous intergenerational wealth. A renter tax credit is one tool lawmakers can use to reduce wealth inequalities both within racial and ethnic groups and between these groups. 

As we show in our new analysis, Black and Hispanic households are more likely to be renters and hold less wealth than white households. Moreover, lower-income white households are more likely to be homeowners, while Black and Hispanic households make up a disproportionate share of low-income renters. This means it’s harder for Black and Hispanic households to build and maintain wealth.  

To get at this systemic problem policymakers could design a well-targeted refundable tax credit for low- and moderate-income renters that bases eligibility on both renter status and income. This would ensure that a higher share of the credit will flow to low-wealth individuals than if the credit was solely based on income or renter status.  

With the Trump administration and Congress heavily debating tax policy this year, here are a few steps policymakers should consider when designing a federal renter credit: 

• Detail a sensible way to define income for eligibility purposes. Broader income measures typically offer a more accurate measure of ability to pay than narrower ones. The income measure should be at least as broad as federal adjusted gross income (AGI), which includes not just wage and salary income but also most business, investment, and retirement income. The main drawback of using a measure broader than AGI is the possibility of increased complexity for taxpayers and the IRS. But there are some benefits to a wider measure that overrides this concern. 

• Determine the size of the credit and population. A small credit amount or scope risks being not enough to shrink wealth inequality, while a substantial credit with a higher cost estimate is more likely to face political pushback.  

• Define renter status and document rent payments. This will require careful work by the IRS. One avenue is through lease agreements or monthly bill statements, which enables households to demonstrate what they have paid in rent. Lawmakers can turn to lessons learned from state programs to determine how best to verify rent. Another option is to require a simple form verifying the tax filer as a renter and determining the credit amount based on fair market rent data that is already determined by the Department of Housing and Urban Development. 

• Decide whether the credit should be distributed monthly or annually. Rent, of course, is typically paid monthly, so the credit could be refunded monthly like the enhanced CTC in 2021. The other option is making it a yearly refundable credit that comes at tax time, like the current CTC and EITC. The IRS has the capability to send either monthly or yearly benefits; the question is less about administration and more about policy goals. 

If lawmakers seek to reduce wealth gaps – both within racial groups and between racial groups —these four policy design elements form a strong foundation for a renter tax credit to achieve that end. 

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