America’s chronic housing affordability crisis is fundamentally rooted in a severe, persistent shortage of housing supply. Economists and housing analysts from across the political spectrum—including researchers at the American Enterprise Institute and the Center for American Progress—broadly agree that the nation requires millions of additional housing units. Building these homes is essential to achieving core economic and social goals, such as restoring historical vacancy and household formation rates, alleviating overcrowding, and restoring genuine housing affordability for working families.
Yet, federal tax policy actively exacerbates the problem. While the U.S. tax code famously incentivizes homeownership, it simultaneously penalizes the creation of new rental housing. One straightforward, pro-growth solution to offset this existing tax penalty is the adoption of immediate expensing for new residential structures.
Under current federal tax rules, a business that purchases machinery, equipment, or other short-lived capital assets can generally deduct the full cost immediately, a pro-growth approach that was recently made permanent in the tax code. However, a real estate developer who invests capital to construct a brand-new apartment building faces a vastly different reality. Instead of immediate expensing, the developer is forced to spread deductions out over a grueling 27.5-year recovery period.
This prolonged depreciation schedule effectively drives deductions down to roughly 50 cents on the dollar in present value terms. Consequently, developers are effectively taxed on phantom income—nominal revenue that does not reflect actual economic value at the time. This structure acts as a steep tax penalty on multifamily residential projects. When projects that would otherwise pencil out financially never break ground, the national housing stock remains smaller, and the broader economy suffers.
Fix the Tax Code for New Capital, or for All Capital?
Policymakers have advanced numerous proposals to counter this tax penalty, but approaches vary enormously regarding how much of the forgone federal revenue directly targets and encourages new construction.
To address this imbalance, lawmakers have introduced targeted legislation in Washington. The Rental Housing Investment Act (RHIA), introduced by Senator Lisa Blunt Rochester (D-DE) in March alongside a bipartisan companion bill in the House introduced by Representative Claudia Tenney (R-NY) in May, offers a direct remedy. The legislation would allow developers of new rental housing—specifically buildings containing two or more units—to immediately deduct up to $150,000 per unit rather than depreciating those costs over 27.5 years. For projects meeting strict affordability criteria borrowed from the federal Low-Income Housing Tax Credit program, the deduction cap would rise to $250,000 per unit.
This proposal represents a significant step toward full expensing, an economic approach that ensures tax codes do not distort private investment decisions. Furthermore, under this legislative design, nearly every dollar of forgone federal tax revenue would directly benefit the creation of new housing units.
When evaluating tax relief, economic research demonstrates that expensing spurs considerably more new investment per dollar of revenue lost than a general corporate tax rate cut. This occurs because the benefits of expensing reach only new capital investments, whereas a broad rate cut delivers windfalls to existing, legacy capital.
Nearly every popular federal housing program currently operates more like a rate cut, showering benefits on both newly constructed housing and decades-old stock. First-time homebuyer tax credits, tax-preferred home purchase savings accounts, and expanded rental assistance all help individuals pay for housing regardless of whether the physical structure was built last month or fifty years ago.
The financial resources devoted to these programs—or equivalently, the federal tax dollars forgone—are thus diluted across the entire existing housing inventory. For instance, in the market for residential real estate, sales of existing homes routinely outnumber sales of newly constructed homes by roughly six to one. Consequently, roughly six out of every seven dollars spent through these broad subsidies are ultimately bid on existing homes rather than creating new supply. Similarly, cheap credit policies managed through the Federal Reserve or government-sponsored enterprises like Fannie Mae and Freddie Mac do not discriminate between new and old housing stock.
By contrast, the RHIA proposal strictly limits neutral tax treatment to properties where the "original use commences with the taxpayer," ensuring that existing, pre-owned buildings remain entirely ineligible. While bonus expensing rules for machinery and equipment typically require no original use test, that restriction is vital for real estate. In recent years, investors have spent staggering sums—reaching roughly $166 billion in a single recent year—purchasing large pre-existing apartment properties, outpacing the $115 billion spent building brand-new multifamily housing.
Permitting the proposed tax deduction to apply to the purchase of used, pre-existing property could easily double the federal revenue cost of the policy while generating zero additional economic incentive for new construction on the margin. Furthermore, restricting the benefit to original-use construction protects taxpayers from subsidizing regions where local zoning laws actively block building. Under an original-use framework, municipalities that permit more construction naturally attract more favorable tax treatment, creating a healthy local economic incentive pushing in favor of upzoning.
Build Three Taken as Much, Get Three Times the Tax Relief
To understand how targeted tax policy influences regional development, consider the contrasting examples of Austin, Texas, and San Diego, California. These two major metropolitan areas possess nearly identical housing inventories—approximately 1.13 million homes in Austin and 1.27 million in San Diego—and experience comparable annual home sales volumes of roughly 36,000 and 32,000, respectively.
Despite these similarities in size and market activity, Austin’s regulatory environment permits roughly three times the volume of new multifamily housing construction, approving approximately 20,100 new units annually compared to San Diego’s 6,800.
A broad housing subsidy that is absorbed indiscriminately by the existing housing stock spends roughly equal amounts of money in both metro areas. A $10,000-per-purchase homebuyer subsidy, for example, would cost between $300 million and $400 million in each city, regardless of local building rates.
By contrast, tax relief that benefits exclusively new construction actively rewards cities that permit building. Assuming full policy uptake, the Austin metro area would benefit by an estimated $353 million per year under the RHIA framework, while the San Diego metro area would capture only $120 million. Delivering three times the financial benefit for three times the housing construction transparently demonstrates what behavior the policy successfully encourages: building new homes.
This dynamic shapes national policy outcomes as well. Financial assistance for the American housing market can be deployed to support the entire existing housing stock of roughly 147 million homes, the roughly 4.8 million homes that trade annually, or the roughly 1.5 million homes that get newly built each year.
The proportion of forgone federal revenue that actually reaches newly built homes varies dramatically depending on program design. For broad policies targeting existing homes, such as local property tax relief or general rental assistance, only about 1 percent of the financial support reaches new homes, reflecting their minor share of the total housing stock in any given year. For policies targeting home purchases, such as buyer credits or dedicated savings accounts, only about 15 percent reaches new construction, matching the ratio of new home sales to total transactions.
For expensing without an original-use test, about half of the benefit reaches new construction, given that investors spend at least as much purchasing existing apartment complexes as builders spend constructing new ones. Under the RHIA framework with its strict original-use test, nearly every single dollar reaches new construction. Analysts estimate that at least 93 percent of the relief directly aids new units, with the minor remainder going to teardown and rebuild projects, such as a 10-unit older building being demolished and replaced by modern construction.
While these estimates rely on certain baseline assumptions and lack granular data for every submarket, removing the original-use test would likely induce market churning as owners trade existing buildings simply to accelerate tax deductions, pulling financial resources even further away from the creation of new housing supply.
Expensing Is Sound Tax Reform and Cheaper Than It Looks
Comprehensive economic analyses indicate that enacting full expensing for all structures would add $537 billion to federal primary deficits over a ten-year window on a conventional accounting basis. However, because full expensing ranks among the most pro-growth changes that can be made to the tax code, its dynamic macroeconomic feedback effects would actually reduce primary deficits by $434 billion over the long run. RHIA-style residential expensing, operating as a targeted subset of broader structural expensing, would exhibit a similarly favorable gap between conventional static revenue scores and dynamic economic reality.
The ongoing housing affordability crisis is driven fundamentally by supply constraints, and much of the political and economic battle is fought at the state and local levels over zoning regulations and building permissions. Federal tax policy alone cannot force municipalities like San Diego to reform restrictive local land-use regulations to match Austin’s housing production.
However, sound federal tax reform can eliminate the persistent tax penalties that discourage the act of building, all without handing out windfalls for capital that already exists. Introducing bonus expensing for new rental housing provides precisely the structural tool needed to help bridge America’s severe housing gap.
