How immediate expensing for new rental housing would change the tax math and boost construction

The useful part

It famously favors owning a home, but penalizes building homes for renters. One simple, pro-growth way to counter this tax penalty is expensing for new residential structures. A business that buys equipment can generally deduct the cost immediately, a pro-growth approach that was recently made permanent.

How it works

• Policymakers have many options that could counter this tax penalty, but approaches differ enormously in how much of the forgone revenue reaches new construction.
• Three times the building yields three times the benefit, which transparently shows what the policy encourages—new construction.
• How much of the forgone revenue actually benefits newly built homes in a given year?
• We caveat that two of these estimates rest on judgment calls, due to lack of data.
• and a present value of 27.5-year straight-line deductions of 56 cents per dollar, consistent with Tax Foundation's general equilibrium model cost recovery Cost recovery refers to how the tax system permits...

What to take from it

Expensing spurs more investment per dollar than a corporate rate cut, because its benefits reach only new capital, while a rate cut also benefits old capital. RHIA relief assumes the $150,000-per-unit cap binds, full take-up, a 26.6 percent average marginal tax rate The marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. America's housing affordability problem is driven by insufficient supply.

Example or evidence

• A developer who builds an apartment building must instead spread the deductions over 27.5 years, driving the deductions down to roughly 50 cents on the dollar in present value.
• Indeed, at the margin, a city that permits more building attracts more of the favorable treatment, an incentive pushing in favor of upzoning.
• Build Three Times as Much, Get Three Times the Tax Relief Consider Austin and San Diego.
• Tax relief that benefits only new construction, by contrast, rewards Austin for building more.

Details worth keeping

In this way, the developer effectively pays tax on income that doesn't exist. That is a tax penalty on multifamily residential projects: projects that would otherwise pencil never happen, the housing stock ends up smaller, and everyone is poorer. The proposal is a strong step toward expensing, an approach that ensures taxes do not distort investment choices.

Related coverage

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• Taxfoundation: Expensing for capital investment is not a special tax break.