Why Cory Booker's Affordable Housing Plan Is Mostly Deficient, But Has Some Good in It

In recent months, I have noticed that various Democratic figures are shifting the Democratic Party to the Left. The Green New Deal, introduced by freshman Congresswoman Alexia Ocasio-Cortez (D-NY), has been a  topic of discussion long after it was voted down. Congresswoman Pramila Jayapal (D-WA) introduced a version of "Medicare for All" that was even more extreme than that of Bernie Sanders (I-VT), which says something. Presidential hopeful Elizabeth Warren (D-MA) has proposed student debt forgiveness. Now Senator Cory Booker (D-NJ) has joined the fun. Booker recently released his affordable housing plan. Before getting into the particulars of his plan, Booker tells the story of the challenges his parents faced in acquiring housing. He then has a five-point plan: renters' tax credit, Baby Bonds, zoning reform, combat housing discrimination, and eliminate homelessness. For time's sake, I am only going to cover the first three in detail here today.

Tax Credit for Renters
Booker has proposed a renters' tax credit that covers the difference between the 30 percent of a beneficiary's income and their rent [capped at the neighborhood fair market rent]. The median tax credit, if enacted, would be $4,800 annually. His reason for such a tax credit is that nearly half of renters pay more than 30 percent of their pre-tax income on rent. To mitigate the burden of rental costs and ultimately allow for better savings to eventually purchase a house, Booker finds this to be part of the solution.

There are some issues with this proposal, such as administrative costs, incidence, and whether the government can deliver the credit when the rent is supposed to be due [monthly], as opposed to one annual tax credit (Tax Policy Center). The main issue with Booker's plan is that his tax credit acts similar to a demand-side subsidy. I agree that a subsidy is technically not the same as a tax break. A tax break is allowing for a taxpayer to keep more of the paycheck that they earn, whereas a subsidy is a government expenditure to directly fund something. However, my caveat with this is that 47 percent of Americans do not pay federal income tax. When looking at federal taxes by income quintile, the lowest quintile pay a net federal tax rate of 1.5 percent. With the average household income for the lowest quintile being $12,457 (Census), the federal taxes that these households pay ($187) is less than the median amount of the tax break proposed by Booker, thereby making the tax credit de facto act as an indirect government subsidy.

That being said, mainstream economic theory states that such a subsidy would artificially push the demand curve upward. While an increase in demand would increase quantity consumed, it would also increase price. This is not mere economic theory. It plays out in practice. With regards to college, government subsidies towards college tuition have caused college tuition prices to skyrocket. Single-payer healthcare has pushed the demand curve well beyond market equilibrium, thereby making healthcare more expensive. Granted, the two main issues with these analogies is that a) they do not take place in the housing market, and b) these are direct government subsidies, whereas Booker's proposal is a tax credit.

If you want me to point out something more directly related, look no further than the mortgage interest deduction (MID), a tax break that de facto subsidizes the housing market. What happened when the government tried to use the tax code to incentivize housing and make it more affordable? Not what was expected, that's for sure. The MID does not make housing cheaper. It merely incentivized people to purchase more expensive homes, thereby increasing indebtedness. The MID did not end up increasing home ownership, which was its primary goal. It actually made it more difficult for lower-income households acquire a house. As such, it would be reasonable to assume that similar unintended consequences would result in the rental housing market, as is brought up in the Tax Foundation's analysis of Booker's renters' credit proposal.

Instead of fighting fire with fire, perhaps Booker could make the tax code more neutral by repealing the MID instead of causing more complexity to the tax code and the housing market.

Baby Bonds
Booker's second proposal, which is actually the one policy idea that currently distinguishes him in the presidential race, is to implement Baby Bonds. A "Baby Bond" is a government-funded savings account that, per his proposal, would grow in a federal trust and provide enough seed capital to fund a downpayment on a house. A study from Columbia University recently found that it would help close the wealth gap between black and white people (Zewde, 2018), a wealth disparity that exists regardless of income quintile (Duke University; St. Louis Federal Reserve). The other good news is that it would cost about $80 billion annually, which would be $800 billion over a decade. This is low compared to certain government budget line items or certain tax credits. It would also be less divisive than reparations. Even if you set up the Baby Bond in a way that the money would only be withdrawn for paying towards a house, we still run into some issues.

1. The tax break acts as a subsidy towards housing. As brought up in the previous section, the mortgage interest deduction (MID) has distorted the housing market with multiple unintended consequences. It would not be surprising to see similar distortions to the housing market as a result of Baby Bonds. 
2. We already have a clear example of how the government handles asset management: Social Security. Social Security provides lower rates of return relative to alternatives (see 2018 Heritage Foundation backgrounder; 2018 OECD report showing that private pensions fare better; 2016 Tax Foundation report; Ahmed et al., 2016; and my 2013 analysis). 
3. My general skepticism surrounding the government's asset management for Social Security is compounded with Booker's plan. When Booker initially proposed the Baby Bonds idea through his "American Opportunities Account Act" in October 2018, he proposed putting them in low-risk bonds at an estimated rate of return of 3 percent. While government bonds don't have the lowest rate of return, there are other higher-yielding options that could further create wealth.  
4. The government shows a lack of political willpower to deal with the fiscal insolvency component of Social Security. Can we expect the Baby Bonds program to realistically stay solvent?
5. More broadly, there is the question of how the U.S. government is going to pay for it. This country is still dealing with burgeoning debt growth. Under the Congressional Budget Office's baseline projections, the debt-to-GDP ratio is going to reach 93 percent by 2029 (CBO, p. 2). It is going to take eighteen years before the first recipients even cash out. In the meantime, the U.S. government has added $800 billion to the debt (plus applied interest payments). Too high of a government debt dampers economic growth, which impacts quality of life, especially for those who Booker is trying to help (see Peterson Foundation; Congressional Research Service; Mercatus Center; European Commission; Dallas Federal Reserve). The Baby Bonds program isn't going to break the bank, but it doesn't mean it wouldn't exacerbate the debt issues, either.
6. Booker plans on increasing the capital gains tax and estate tax. An increase in the capital gains tax and estate tax would slow down wealth growth, which would be ironic considering that wealth is what Booker is trying to grow. 
7. One criticism of the Baby Bonds is dealing with more imminent poverty issues, such as child poverty. University of Chicago law professor David Hemmel argues that the focus should be on child poverty because the effects of poverty on a child are lifelong. Hemmel posits that it would be preferable to address these current issues, in no small part because there are many developmental needs that need to be met before the individual would cash out on the Baby Bond at age 18. Zewde, the author of the Columbia University, presents the counterargument that providing children with hope about their future has its own intangible benefits. 
8. There is an issue of political feasibility. Even if the Democrats took both Congress and the White House, a recent Rasmussen poll shows that 48 percent of Americans disapprove of Booker's proposal.
9. Much like I expressed with the child tax credit, I have a philosophical qualm as to whether childless households should have to support another household's choice to support children. A philosophical qualm is more subjective than a policy outcome, but it's still worth considering.
10. Since this is part of a housing plan, let's assume that the Baby Bond could only be cashed for housing purposes. Booker's plan comes with the paternalistic assumption that lower-income households do not know how to best spend this accumulated wealth, which is why Booker proposes that the spending goes towards housing. Forgetting that owning a house is not for everyone, I have to ask this question: If lower-income households cannot be trusted with spending the accumulated wealth on something aside from housing, how can we trust them to make the right spending decision with regards to the house for which they make the downpayment? 
• Alternatively, let's assume that the eighteen-year old could gain access and use it for whatever they would like. In this alternative, the plan would implicitly assume that the young adult is going to spend that money wisely. This individual just became an adult. There is a chance that they are going to spend it on something stupid or frivolous, especially considering that the brain doesn't fully mature until around the age of 25. There is also a high likelihood that they are going to get their college tuition bill and spend it towards college. If the Baby Bond turns into a federal subsidy for college tuition, we already know that such a subsidy is going to cause college costs to skyrocket further.

Zoning Reform
Booker points out that restrictive land use regulations have constrained affordable housing by more than 50 percent from 1964 to 2009. I wrote a piece a couple of years ago on land use regulations (also see October 2017 policy report from the Cato Institute), and this is the one area in which Booker and I are in total agreement. Land use regulations have driven up housing prices by constraining housing supply, as well as create more volatile boom-and-bust cycles in the housing market.

Bottom Line: Baby Bonds and renters' tax credits are only going to add to the issues of affordable housing. If we want to make a difference, two sound policies would be abolishing the mortgage interest deduction (MID) to make housing more affordable and to remove land use regulations in order to increase affordable housing supply.