Revised August 1, 2006
RENT CHANGES IN HOUSING BILL WILL HELP MANY TENANTS
By Will Fischer
On June 14, 2006 the House Financial Services
Committee passed H.R. 5443, the Section 8 Voucher Reform Act (SEVRA). The bill
would alter the rules for setting rents for tenants in public housing and
project-based Section 8 units, as well as for voucher holders.
[1] The full House will likely consider
the bill in the fall; some or all of SEVRA’s provisions could also be included
in end-of-year appropriations legislation.
Most importantly, SEVRA rejects an Administration
proposal to let housing agencies set rents essentially at any level. [2] Instead,
it would retain the “Brooke rule,” which sets rents at 30 percent of a tenant’s
income. In addition, SEVRA would:
- Replace complicated work deductions with a
simple earnings deduction. SEVRA would eliminate two work-related deductions
(the child care deduction and one-time earned income disregard) that benefit
relatively small numbers of tenants. Instead, it would deduct 10 percent of
all earnings from the income used to set rent levels, a change that would cut
rents for most working tenants.
- Increase the standard deduction for the
elderly and people with disabilities while reducing medical deductions. The
standard deduction for these households would rise from $400 to $750. At the
same time, SEVRA would scale back the medical deductions available to the
elderly and people with disabilities, who would only be allowed to deduct
medical costs that exceed 10 percent of their income (the current threshold is
3 percent of income). This latter change would raise rents for some
households, but the majority of tenants who are elderly or have disabilities
would gain more from the increase in the standard deduction than they would
lose from the change in the medical deduction.
- Reduce the frequency of income reviews.
Housing agencies and owners would have to conduct income recertifications for
people on fixed incomes (like Social Security or SSI) only once every three
years, instead of the current minimum of once each year. The bill would also
end mid-year recertifications for small income changes. In addition, SEVRA
would set rents for working tenants based on their income in the previous year
rather than the current one, giving tenants an extra year before increases in
their incomes translate into higher rents.
- End assistance to individuals whose assets or
incomes exceed prescribed limits. SEVRA would end housing assistance for
households with more than $100,000 in assets. It also would require housing
agencies to make tenants whose incomes exceed the program limit (80 percent of
the local median income) leave public housing and project-based Section 8
units. Together, these changes would affect fewer than 1 percent of tenants,
but they could cause hardship for some.
It is important to recognize that some tenants
would be worse off under SEVRA than under the current system. But the
non-partisan Congressional Budget Office (CBO) has found that the bill would
reduce average rents, and other data indicate that most tenants would see their
rent drop.[3]
SEVRA also would make it easier for tenants, agencies, and owners to calculate
rents.
It is worth noting that the bill could change as
it works its way through Congress. CBO’s analysis found that SEVRA would raise
federal costs if the federal government gave agencies and owners additional
funding to cover the rent revenues that would be lost. Congress probably will
seek to modify the bill to minimize those additional federal costs, and these
modifications could raise rents. Even if some such changes are made, SEVRA
could still leave tenants ahead, on average — but this obviously depends on what
those changes are.
Changes in Income Deductions Used to Calculate
Rent
SEVRA’s biggest effects on tenant rents would
stem from the changes it would make in the amounts housing agencies and owners
deduct from a household’s income to calculate its rent. SEVRA would change all
of the income deductions now used in the housing assistance programs.
Work-Related Deductions
SEVRA would replace the existing one-time earned
income disregard (EID) and child care deduction with a deduction of 10 percent
of all earnings for all working households.
- Under SEVRA, working households that do not
benefit from the EID or child care deduction would see rent reductions of up
to 10 percent (because 10 percent of their earnings would not be counted when
calculating their rent).
- Some households that would otherwise have
benefited from the current EID would temporarily experience higher rents as a
result of SEVRA. (The EID is available to working public housing tenants and
people with disabilities who have Section 8 voucher assistance, if they
experience income increases and meet other qualifications. It applies to rent
calculations for up to 24 months in a 4-year period.) But much of this effect
would be offset by the use of prior-year earnings to set rents, discussed
below. And because SEVRA’s 10 percent deduction, unlike the EID, has no time
limit, even many households that would be better off under the current EID in
the short term would be better off under the new policy over a longer period.
- Households that have high child care costs, do
not receive subsidies to reimburse those costs, and are fortunate enough to
receive the current child care deduction (which is administered somewhat
inconsistently by housing agencies and owners) would experience significant
rent increases under SEVRA.
CBO estimates that 30 percent of housing
assistance tenants have earnings but only about 5 percent benefit from the child
care deduction. The number of households that receive the current EID is not
available, but CBO reports that “over $10 million” of income is deducted per
year as a result of the EID — a very small amount compared to the approximately
$2 billion that would be deducted under SEVRA’s 10 percent deduction. These
figures indicate that many more tenants would benefit from SEVRA’s changes in
work deductions than would be harmed.
Standard Deduction for Minors and Other
Dependents
SEVRA would increase slightly the amount of
income deducted for each dependent, from $480 to $500, and adjust the deduction
based on inflation over time. The latter change would be important over the
long term: the dependent deduction has lost about half of its value to
inflation since it was first set in 1984.[4]
Deductions for
the Elderly and People with Disabilities
SEVRA would increase the standard deduction for
households whose head (or the spouse of the head) is elderly or has a disability
from $400 to $750 and adjust that deduction for inflation in later years. On
the other hand, SEVRA would scale back the deduction for medical and disability
expenses for these same elderly and disabled households. Only expenses
exceeding 10 percent of the household’s income could be deducted, instead of
expenses above 3 percent of income as is currently the case.[5]
When these
changes are looked at together:
- All elderly and disabled households with
incomes below $5,000 would experience rent reductions under SEVRA, of up to $9
a month.
- Households with higher incomes would see their
rents fall by up to $9 a month if they now deduct few or no medical expenses.
- Households with incomes above $5,000 that now
take substantial medical deductions would experience rent increases because
the drop in their medical deduction would outweigh the increase in their
standard deduction. But there would be a limit to how much their rents could
rise, because they would still be able to deduct expenses that are greater
than 10 percent of their income. For a household with an annual income of
$10,000, rents could rise by up to $9 a month, while a household with an
income of $20,000 could see an increase of up to $26 a month.[6]
The available
data indicate that a substantial majority of elderly and disabled households
fall into the first two of the above three categories — the groups that would
receive modest rent reductions. A further benefit of SEVRA is that fewer
households would be required to submit receipts and other documentation to
verify medical and disability expenses.
Changes in Rent Calculation Procedures
SEVRA would make several significant changes in
the procedures housing agencies and owners use to determine tenants’ income:
- Less frequent recertifications for households
on fixed incomes. Currently, housing agencies and subsidized owners must
conduct income reviews every year for all tenants, including those who receive
most or all of their income from Social Security or SSI and consequently are
unlikely to experience much income variation from one year to the next. SEVRA
would allow agencies to review the incomes of tenants with fixed incomes
(including private pensions and certain other periodic payments along with
Social Security and SSI) every three years. In the intervening two years,
rents would increase slightly based on the rate of inflation. The main effect
of this change would be to reduce the burden that recertification places on
tenants with fixed incomes, as well as on agencies and owners.
- Use of prior-year income to set rents.
Currently, rents are based on a tenant’s anticipated income in the period that
the rent will cover (usually the coming 12 months). For tenants with earned
income, SEVRA would require agencies to base rents on a tenant’s actual income
in the previous year. SEVRA also would allow agencies to set rents based on
prior-year income for tenants with unearned income. Use of prior-year income
would cause tenants to face somewhat higher rents if their current income is
lower than in the previous year, but they would have access to a rent
adjustment for income drops of more than $1,500. Otherwise, the use of
prior-year incomes should generally help tenants, because an increase in their
income would not cause an increase in their rent until a year later. This
policy change also may reduce tenants’ income verification burdens, as tenants
could use tax returns and W-2 forms more readily to document their income.
- Fewer interim recertifications. Housing
agencies and owners currently are required to conduct interim recertifications
between annual reviews at the request of any tenant whose income drops by any
amount, and can choose to require recertifications any time a tenant’s income
increases. Under SEVRA, recertifications would be conducted only for
increases in annual unearned income exceeding $1,500 and for drops in income
of at least $1,500.
- If an agency or owner currently conducts
recertifications for all increases in incomes, tenants whose earnings
increase — or whose unearned income increases by less than $1,500 — would
pay less rent as a result of this SEVRA provision than under the current
system. Such added income would not be considered until the next annual
recertification.
- Tenants whose annual income drops by less
than $1,500 generally would pay more under this SEVRA provision than under
the current system. Depending on how the provision is implemented, the
$1,500 threshold for interim recertifications could expose some tenants to
significant hardship until their income loss totals $1,500 (or until their
next annual recertification, if that comes sooner).[7]
On the other hand, as with the reduction in recertifications for
fixed-income households, the changes would mean that tenants would have to
participate in fewer recertifications.
- Fewer verification requirements. SEVRA
contains a number of provisions to make it easier for tenants to document
their incomes and expenses for agencies and owners. In addition to the
above-mentioned changes in deductions and recertifications, the bill would
allow agencies and owners to calculate rents based on income levels verified
by other government agencies (such as social services agencies) without
re-verifying the income themselves.
Changes in Eligibility Rules
SEVRA adds two new rules that would end
assistance to a small number of tenants.
- Asset test. SEVRA would make households
ineligible for housing assistance if they have more than $100,000 in assets or
own a home (of any value) that is available for them to live in.[8]
Currently, there is no limit on the amount of assets a person may have and
receive housing assistance, although income from assets is taken into account
in determining tenants’ rents. CBO estimates that the $100,000 asset limit
will cause about 8,000 households to lose assistance. Because the $100,000
limit is high, though, this change would only affect tenants who have
substantial resources available to them (although some affected households
that rely on their assets to supplement limited retirement or disability
benefits could nonetheless struggle to afford housing without assistance).
The subsidies lost by these tenants would go to generally needier households
on the waiting list for assistance.
- Over-income tenants. Currently, residents of
privately-owned subsidized housing and public housing can continue to live in
their units under some circumstances even after their incomes rise above the
income eligibility limit (80 percent of the local median income). SEVRA would
require housing agencies and owners to force these “over-income” tenants to
leave their homes and terminate any assistance they received.[9]
CBO estimates that about 19,000 households would be affected. While the
change would only affect persons who are relatively well off, it would still
cause some hardship, particularly in cases where a family loses assistance
because of a temporary increase in income.[10]
Appendix: Impact of Rent Changes on Sample
Tenants
Working Families
Example #1
Monthly earned income: $1,000
2 children, no child care deduction, no earned
income disregard.
Under Existing Rules:
Adjusted income = Gross income ($1,000) –
Dependent deductions (($480 x 2)/12) = $920
Rent = $276
Under SEVRA:
Adjusted income = Gross income ($1,000) –
Dependent deductions (($500 x 2)/12 – Earnings deduction ($1000 x 10%) = $817
Rent = $245
Impact of SEVRA on rent: $31 reduction[11]
Example #2
Monthly earned income: $1,000
2 children, $300 per month child care deduction,
no earned income disregard.
Under Existing Rules:
Adjusted income = Gross income ($1,000) –
Dependent deductions (($480 x 2)/12) – Child care deduction ($300) = $620
Rent = $186
Under SEVRA:
Adjusted income = Gross income ($1,000) –
Dependent deductions (($500 x 2)/12 – Earnings deduction ($1000 x 10%) = $817
Rent = $245
Impact of SEVRA on rent: $59 increase
Elderly and People with Disabilities
Example #3
Monthly income: $750
Elderly or disabled household, no dependents, no
unreimbursed medical expenses.
Under Existing Rules:
Adjusted income = Gross income ($750) -
Elderly/disabled deduction ($400/12) = $717
Rent = $215
Under SEVRA:
Adjusted income = Gross income ($750) -
Elderly/disabled deduction ($750/12) = $688
Rent = $206
Impact of SEVRA on rent: $9 reduction
Example #4
Monthly income: $750
Elderly or disabled household, no dependents,
$200/month unreimbursed medical expenses.
Under Existing Rules:
Adjusted income = Gross income ($750) -
Elderly/disabled deduction ($400/12) - Medical expense deduction with 3 percent
threshold ($178) = $539
Rent = $162
Under SEVRA:
Adjusted income = Gross income ($750) -
Elderly/disabled deduction ($750/12) - Medical expense deduction with 10 percent
threshold ($125) = $563
Rent = $169
Impact of SEVRA on rent: $7 increase
End Notes:
[1]
The bill also contains other, mainly positive changes to the voucher
program, and one potentially harmful change: an expansion of the number of
agencies HUD could exempt from most public housing and voucher rules through
the “Moving to Work” demonstration. See Barbara Sard and Will Fischer,
“Bipartisan Bill in House Would Make Marked Improvements in Housing Voucher
Program, but Bill’s Waiver Provision Raises Concerns,”
https://www.cbpp.org/5-30-06hous.htm.
[2]
The appendix to this analysis
(available at
https://www.cbpp.org/7-27-06hous-app.pdf) provides a detailed comparison
of rent provisions in current law, SEVRA, and the Administration proposal.
[3]
CBO’s analysis is available at
http://www.cbo.gov/ftpdocs/73xx/doc7362/hr5443.pdf.
[4]
Under SEVRA, only income “received from all sources by” household members
who are 18 or older would be included in the rent calculation. This
language could potentially be interpreted to exclude all income of minors
(including SSI and Social Security survivor’s benefits), but this almost
certainly was not the committee’s intent. More likely, the language would
be interpreted under most circumstances to exclude only the earned income of
minors, as under current law.
[5]
The bill would eliminate the deduction for disability-related expenses that
allow someone to work in a household that is not considered “elderly” or
“disabled” by HUD’s definition — that is, where someone other than the
household head or the head’s spouse has a disability. This harmful change,
which would cause substantial rent increases for a small group of tenants,
appears to have been a technical mistake that likely will be corrected as
the bill moves forward.
[6]
See the Appendix for examples of how rent calculations would change under
SEVRA for different types of households.
[7]
SEVRA does not specify whether a household must have experienced an actual
income decline of $1,500 to trigger a recertification, or whether a change
in monthly income that would add up to a $1,500 reduction over the course of
a full year — that is, a change of $125 in a month — would be sufficient.
Under the second interpretation, the $1,500 recertification threshold would
never cause a household’s rent to be more than $38 a month higher than it
would be under the current system, so few households would experience
hardship as a result. Because the bill is ambiguous on this point, HUD (or
housing agencies and owners) would likely determine how it would be
implemented.
[8]
The bill’s current language explicitly excludes equity in homes assisted with
homeownership vouchers from counting toward the $100,000 asset limit, but does
not exempt homeownership voucher tenants (or residents with an ownership
interest in limited equity co-operatives assisted with Section 8) from the
separate ban on tenants owning a home of any value. If left unchanged, the
effect would be to terminate assistance for many current housing assistance
tenants and destroy the voucher homeownership program. This effect was not
intended, and it is likely that the bill will be modified to protect tenants who
receive homeownership assistance through Section 8.
[9]
The change would also end assistance to voucher holders with incomes over 80
percent of median. But even under current law few voucher holders with
incomes that high are eligible for assistance, because the rent they would pay
based on 30 percent of their income would usually be higher than the voucher
payment standard.
[10]
Because it would terminate higher-income tenants who pay relatively high
rents and replace them with lower-income tenants, this change would have a
considerable cost — more than $70 million in the first year, according to
CBO. As a result, there is some possibility the change will be scaled
back in order to reduce the bill’s cost.
[11]
The changes SEVRA would make in the process for determining tenant incomes
could have some additional effects on rent payments — beyond the effects of
the deduction changes shown in these examples — depending on how a tenant’s
income changes over time. For example, SEVRA would provide an additional
benefit to a working household with lower earnings (or no earnings at all)
in the previous year because of the use of prior year earnings to set
rents. This and other changes in the income certification process are
discussed in the body of the paper.
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