Candice Horbacz
America’s persistent housing affordability crisis is fundamentally a problem of insufficient supply, a consensus view shared across diverse economic think tanks and policy organizations. Experts from institutions like the American Enterprise Institute and the Center for American Progress consistently highlight a nationwide deficit of millions of homes required to restore historical vacancy rates, accommodate new household formations, alleviate overcrowding, and ultimately improve affordability for all Americans. A critical, yet often overlooked, contributor to this systemic imbalance is the existing federal tax code, which has long favored homeownership while inadvertently penalizing the very act of constructing new rental housing. One potent, pro-growth legislative approach to counteract this disincentive is the implementation of immediate expensing for new residential structures.
The current tax landscape presents a stark contrast in how different types of business investments are treated. Businesses investing in new equipment or machinery can typically deduct the full cost immediately, a policy known as "full expensing" that was recently made permanent due to its recognized benefits for economic growth and investment. However, a developer embarking on the construction of a new apartment building faces a different reality. Instead of immediate deduction, they are compelled to spread these deductions over a protracted period of 27.5 years. This lengthy depreciation schedule significantly diminishes the present value of these deductions, effectively reducing them to approximately 50 cents on the dollar when accounting for the time value of money. The practical consequence is that developers are taxed on income that, from an economic standpoint, does not truly exist, creating a tangible tax penalty on multi-family residential projects. This disincentive can render otherwise viable projects financially unfeasible, leading to a smaller overall housing stock and contributing to the broader affordability challenges that impact millions of households.
Policymakers are actively exploring various avenues to mitigate this tax-induced penalty on rental housing development. These approaches, however, vary considerably in their efficiency, particularly in how much of the forgone tax revenue directly translates into new construction. A notable legislative initiative addressing this disparity is the Rental Housing Investment Act (RHIA). Introduced in March by Senator Lisa Blunt Rochester (D-DE), with a bipartisan companion bill later introduced in the House in May, the RHIA proposes a significant reform. It would permit developers of new rental housing—defined as buildings with two or more units—to immediately deduct up to $150,000 per unit. For projects that meet specific affordability criteria, often aligned with those used in the successful Low-Income Housing Tax Credit (LIHTC) program, this immediate deduction cap would increase to $250,000 per unit. This contrasts sharply with the current 27.5-year depreciation schedule and represents a substantial step towards a more neutral and economically efficient tax treatment for rental housing investment. The RHIA’s design is particularly impactful because nearly every dollar of forgone revenue under this proposal would directly benefit the creation of new housing units, a crucial distinction from broader housing subsidies.
The Economic Imperative of Targeted Tax Reform
The concept of expensing, particularly when applied to new capital investments, is widely recognized by economists as a powerful catalyst for economic growth. It stimulates more investment per dollar than, for instance, a general corporate rate cut, because its benefits are exclusively channeled towards new capital formation. A broad corporate rate cut, while also stimulating the economy, simultaneously provides a windfall to existing capital, diluting its marginal impact on new investment.
This distinction between targeting new capital versus benefiting all capital, both old and new, is critical in the context of housing policy. Many popular federal housing programs, while well-intentioned, are structured more like a general "rate cut" for housing, offering benefits that extend to both new and existing housing stock. Examples include first-time homebuyer credits, various tax-preferred home purchase accounts, and broad rental assistance programs. While these programs aim to make housing more accessible or affordable, the dollars spent—or the tax revenues forgone—are spread across the entire housing market, not just new construction.
Consider the distribution of benefits: in the case of government subsidies for home purchases, existing home sales typically outnumber new home sales by a substantial margin, often six to one. This means that for every seven dollars allocated to such programs, approximately six dollars are effectively bidding up the price of existing homes, with only one dollar incentivizing the creation of new supply. Similarly, policies promoting cheap credit through entities like the Federal Reserve or government-sponsored enterprises such as Freddie Mac and Fannie Mae do not differentiate between new and old housing stock, meaning their impact on stimulating new construction is indirect and often less efficient.
The RHIA proposal, by contrast, incorporates a critical "original use" provision. This stipulation ensures that the neutral tax treatment—the immediate deduction—is only available for property whose "original use… commences with the taxpayer." This explicitly excludes existing buildings from eligibility. While bonus expensing for machinery and equipment often does not require an original use test, this restriction is far more significant for buildings due to the dynamics of the real estate market. In a recent year like 2025, investors spent an estimated $166 billion purchasing large existing apartment properties. This figure dwarfs the $115 billion spent on building new multi-family housing in the same period. Without an original use test, a policy of full expensing could inadvertently double the tax revenue cost without generating any additional incentive for new construction on the margin. It would primarily reward the churning of existing assets rather than the creation of new ones.
Furthermore, the original use restriction serves as an important safeguard, ensuring that taxpayers are not subsidizing favorable tax treatment in areas where new building is already constrained or blocked by local regulations. In essence, cities that adopt more permissive building policies—such as upzoning—would naturally attract more of this favorable tax treatment, creating an implicit incentive for local jurisdictions to reform their land use regulations and permit more construction. This alignment of federal tax policy with local zoning reform efforts is a powerful, yet often overlooked, mechanism for addressing supply constraints.
The Austin-San Diego Contrast: Rewarding Growth
To illustrate the tangible impact of targeting benefits towards new construction, consider a comparison between two prominent U.S. metropolitan areas: Austin, Texas, and San Diego, California. Both metros are significant urban centers with nearly comparable housing stocks—Austin with approximately 1.13 million homes and San Diego with 1.27 million. They also exhibit similar annual home sales volumes, with roughly 36,000 sales in Austin and 32,000 in San Diego. However, their approaches to new housing development diverge dramatically. Austin has demonstrated a considerably more permissive regulatory environment, leading to the permitting of roughly three times more new multi-family housing units annually—around 20,100 units—compared to San Diego’s approximately 6,800 units.
Under a housing program that is absorbed broadly by the existing housing stock or by general home purchases, the financial benefits would be distributed roughly equally between these two metros, simply because their existing stock and sales volumes are similar. A $10,000-per-purchase homebuyer subsidy, for example, would cost approximately $300 million to $400 million in each metro, assuming complete uptake and no behavioral response.
However, a tax relief policy that specifically targets and benefits only new construction, such as the RHIA, would disproportionately reward Austin for its proactive building policies. Assuming complete uptake of the RHIA benefits and reasonable parameter assumptions (such as a 26.6 percent average marginal tax rate and a present value of 27.5-year straight-line deductions of 56 cents per dollar, consistent with Tax Foundation models), the Austin metro would stand to benefit by an estimated $353 million per year. In stark contrast, the San Diego metro would receive only about $120 million in benefits. This disparity clearly demonstrates the policy’s design: three times the building yields three times the benefit, transparently encouraging and incentivizing the very new construction that America desperately needs. This illustrates how federal tax policy can be a powerful lever to influence local land use decisions without directly mandating them.
Efficiency of Investment: New Homes vs. Existing Stock
Scaling this Austin-San Diego comparison to a national level reveals profound implications for policy efficiency. The question becomes: how much of the forgone tax revenue from various housing policies actually translates into the construction of newly built homes in a given year? This is crucial for assessing a policy’s effectiveness in addressing the supply shortage.
To put this in perspective, the U.S. housing market comprises approximately 147 million existing homes. Annually, about 4.8 million homes are sold (4.1 million existing homes plus 0.7 million new homes), while roughly 1.5 million new homes are built.
- Policies targeting existing homes: For initiatives like broad property tax relief or general rental assistance, only about 1 percent of the forgone revenue would directly benefit newly built homes. This is simply because new homes represent roughly 1 percent of the total housing stock in any given year. The vast majority of benefits would accrue to existing property owners or renters in existing units.
- Policies targeting home purchases: For programs such as homebuyer credits or home-purchase savings accounts, approximately 15 percent of the forgone revenue would benefit new homes. This reflects the fact that roughly one out of every seven home sales is a new home. While better than targeting existing stock, it still means a significant portion of the subsidy is bidding up prices on existing inventory.
- Expensing without an original use test: If expensing were extended to all residential structures, new and old, approximately half of the forgone revenue would benefit new construction. This estimate is based on the observation that investors spend at least as much each year purchasing existing apartment buildings as builders spend constructing new ones. This estimate may even be conservative, as it doesn’t fully account for the share of land value in purchase prices or the total value of smaller existing property purchases.
- RHIA’s expensing with the original use test: This is where the RHIA proposal shines in terms of efficiency. With its explicit requirement for "original use," nearly every dollar of forgone revenue would directly contribute to new construction. Estimates suggest at least 93 percent of the benefits would go to genuinely new units, with the remainder potentially going to teardown rebuilds. Even this small residual for teardowns is likely an overestimate for multi-family units, as one multi-family teardown lot typically yields many new units, making the net new unit creation still very high. An even more refined approach, such as an "incremental-units test" that provides neutral treatment only for units added beyond those already on the parcel, could further close this small gap.
It’s important to caveat these estimates, as some rely on informed judgment due to data limitations. For instance, precisely quantifying the share of purchased apartments that were newly built in the same year, or the total value of small existing property purchases, can be challenging. However, the qualitative difference in efficiency between these policy designs remains robust. Crucially, these estimates typically assume no behavioral response to the policy. In reality, removing the "original use" test would likely increase churning in the market, as owners might trade existing buildings solely to accelerate deductions, thereby diverting even more relief away from genuinely new construction. The "original use" test is a powerful guardrail against such unintended consequences.
Expensing: Sound Tax Reform and Fiscal Prudence
From a broader tax reform perspective, expensing for structures is not merely a housing policy; it is fundamentally sound tax reform. The Tax Foundation’s comprehensive analysis in "Options for Reforming America’s Tax Code 3.0" highlights the significant economic benefits of full expensing. While conventionally scored, full expensing for all structures might appear to add $537 billion to primary deficits over a decade, its dynamic scoring—which accounts for the positive economic feedback loops of increased investment and growth—tells a different story. Dynamically, such a policy is projected to reduce primary deficits by $434 billion over the same period, making it one of the most pro-growth tax changes available.
RHIA-style residential expensing, as a targeted subset of full structures expensing, would exhibit a similarly large gap between its conventional and dynamic revenue scores. This means that while it may have an upfront "cost" on paper, the long-term economic stimulus from increased housing construction, job creation, and broader economic activity would likely offset, or even exceed, that initial revenue loss. The policy essentially pays for itself through growth.
America’s housing affordability problem is undeniably complex, with its roots deeply embedded in various supply constraints. Many of these constraints are localized, stemming from state and local zoning decisions, land use regulations, and community opposition to new development. Federal tax policy alone is unlikely to transform a city like San Diego into a building powerhouse comparable to Austin overnight. However, sound tax reform can play a pivotal role by removing federal disincentives that currently penalize the act of building. By eliminating the tax penalty on new construction and directing incentives efficiently, federal policy can complement and amplify positive changes at the state and local levels.
Bonus expensing for new rental housing, as embodied in the RHIA, represents precisely the right tool for this purpose. It ensures that the tax code ceases to distort investment choices, promotes economic efficiency, and directly addresses the critical need for increased housing supply without providing an unnecessary windfall to existing capital. It is a strategic intervention that recognizes the economic reality of housing development and offers a clear path toward a more affordable and well-supplied housing market for all Americans.
