How Would a $15 per Hour Federal Minimum Wage Affect Working Class Tenant Eligibility for Affordable Rental Housing?

Published by Thomas Stagg on Friday, February 12, 2021 - 12:00am

As Congress considers another COVID-19 relief bill under budget reconciliation rules, one particular provision has received a fair amount of attention: the proposal to raise the federal minimum wage to $15 per hour by 2025.

Raising the minimum wage to $15 per hour would have a life-changing benefit for millions of low-income American workers that remain employed after implementation, enabling them to better afford housing and many life necessities, and likely saving the federal government billions of dollars through the reduction of income security payments.

In addition, a federal minimum wage increase would affect income eligibility of low-income households and the future of affordable rental housing policy. According to Novogradac’s analysis, a two-person household each earning the federal minimum wage is projected to earn more than 60% of the area median income (AMI) and thus generally be income ineligible for low-income housing tax credit (LIHTC) financed properties in 96% of the country. In eight states, such two-person households would NOT be income eligible for LIHTC or HUD-assisted housing anywhere in the state, as they are projected to have incomes above 80% AMI.

Even a four-person household with two minimum wage earners is projected to become income ineligible at the 60% AMI threshold in more than 83% of the nation. Unless Congress acts to change LIHTC and HUD income eligibility, an increased federal minimum would mean that affordable rental housing may increasingly be open only to unemployed or under-employed households.

Federal Minimum Wage Increase Proposal Overview

On Jan. 26, House Education and Labor Committee Chairman Bobby Scott, D-Virginia, introduced H.R. 603, the Raise the Wage Act of 2021, which would gradually increase the federal minimum wage from the current $7.25 to $15 per hour in 2025, after which it would be indexed by increases in median wages. Senate Budget Committee Chairman Bernie Sanders, D-Vermont, introduced S. 53, the Senate companion bill the same day.

In addition to the standard federal minimum wage, specialized federal subminimum wage rates—tipped wage, youth wage, and wages for workers with disabilities (14(c) wages)—would eventually be phased out over a longer period under the legislation, leaving just one federal minimum wage for all workers in 2027. See below for the proposed schedule:

Blog Table: Scheduled Minimum Wage Increases Under the Wage Act of 2021
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Raising the federal minimum wage has been a consistent Democratic priority for many years, as the last time Congress acted to raise the federal minimum wage was 2007. More recently, President Joe Biden has called for a $15 per hour federal minimum wage as part of his COVID relief plan, but has also recently acknowledged that the proposal may not be able to be included in COVID-19 relief legislation. Given likely Republican opposition, Democrats will advance the COVID-19 relief legislation, including the proposal to increase the federal minimum wage to $15 per hour by 2025, via budget reconciliation, which would allow Congress to pass the legislation without Republican votes. It is uncertain whether the federal minimum wage increase proposal is allowable under the budget reconciliation rules. However, Biden also said he will continue to push the proposal in other legislation if it is not included in the COVID-19 relief legislation.

According the recently released Congressional Budget Office (CBO) report on the Raise the Wage Act of 2021, raising the federal minimum wage to $15 per hour would increase the federal deficit by $54 billion over 2021-31, largely as a result of increased spending on federally financed health care, primarily through Medicare and Medicaid. Such a budget effect has prompted advocates of the proposal to argue that a federal minimum wage increase should survive a challenge under the budget reconciliation rules. Others, however, argue that such an effect is merely incidental as compared to the overall economic impact of the proposal. The Senate parliamentarian has not yet ruled on the matter.

CBO also estimated that the cumulative pay of affected people would increase, on net, by $333 billion (a $509 billion gross increase offset by $175 billion in lower pay because of reduced employment). CBO determined the federal minimum wage increase would boost the wages of about 17 million workers and lift 900,000 Americans out of poverty.  However, CBO also estimated national employment would be reduced by 1.4 million or 0.9% as a result of the federal minimum wage increase.

Effect on qualifying for affordable housing

Putting aside the arguments in favor or against the proposal, it is worthwhile to evaluate the implications of the proposal for LIHTC-financed properties. Novogradac conducted an analysis to determine the impact of an increase in the minimum wage on LIHTC income eligibility, given the following three LIHTC statutory minimum set-aside elections:

  1. 20% of the units must be reserved for households earning 50% of area median income (AMI)
  2. 40% of the units must be reserved for households earning 60% AMI
  3. 40% of the units must be reserved for households earning an average of 60% AMI, with no household earning more than 80% AMI (Average Income Test)

Methodology

To determine the percent of areas where households earning the current federal minimum wage ($7.25 per hour) at various full-time equivalencies (FTE, at 40 hours per week) would become income ineligible Novogradac used HUD’s fiscal year (FY) 2020 income limits, the latest available such limits. HUD is expected to release FY 2021 income limits on or around April 1.

Novogradac’s analysis shows the percent of areas where a household of a given size would be over the initial income limit qualification threshold.  The higher the percent, the fewer number of areas that household could qualify for. Zero percent means that the household could qualify in all areas. One-hundred percent means there is not an area in the country where the household could qualify for LIHTC housing at the specified threshold:

Blog Table: Percentage of Areas Where Households Earning $7.25/hr Could Not Qualify for Housing
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As can be seen above, even at the current federal minimum wage, there are many areas where a two-person household working two full time jobs would not qualify at either 50% and 60% AMI.

Next, Novogradac ran the same analysis using the proposed 2022 federal minimum wage of $11 per hour using FY 2020 income limits.

Blog Table: Percentage of Areas Where Households Earning $11/hr Could Not Qualify for Housing
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The increased federal minimum wage has a more immediate impact on prospective tenants’ ability to qualify for LIHTC housing.  Even at the highest allowed income of 80%, a two-person household working two full-time jobs would not qualify for housing in nearly 48% of the areas.

Finally, to quantify the effect once the $15 per hour minimum wage is fully implemented in 2025, Novogradac ran the same analysis using $15 per hour, but to approximate 2025 income the analysis trended the 2020 income limits forward five years at a 3% growth rate.

Blog Table: Percentage of Areas Where Households Earning $15/hr Could Not Qualify for Housing
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At a $15 per hour minimum wage, a two-person household working two full jobs would have difficulty qualifying for housing in most areas in the country. 

Blog Graphic: Ineligible Areas Increase as Minimum Wage Rises to $15 per Hour
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See below for a state-by-state breakdown of the percent of areas that a two-person household working two full-time jobs would be able to qualify for housing. Note, the percentages are flipped here to show the percent of areas where a household could qualify. No such households would be LIHTC-income eligible at any threshold in Arizona, Arkansas, Georgia, Idaho, Louisiana, Mississippi, South Carolina or Tennessee.  Except in the U.S. Virgin Islands, no such household would be LIHTC income eligible in any overseas U.S. territory.

Blog Table: Percentage of Areas Where Households Earning $15/Hr Could Qualify for Housing
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LIHTC properties must be underwritten over 15 years. The scheduled increases in the federal minimum wage would affect the ability of properties to lease their units to full-time workers over that period, and negatively affect the underwriting of those properties.

With regard to LIHTC properties electing to meet the Average Income Test set aside, it should be noted that for every unit reserved for 80% AMI households, a unit would also need to be reserved for households earning at or below 40% AMI. Even if minimum wage earnings were under the 80% AMI income limits for a particular area, such 80% AMI units may need to be paired with units reserved for households earning 40% AMI or less where full-time minimum wage earners would likely be income ineligible, resulting in properties where at least half of the units were likely occupied by unemployed or under-employed adults.

As noted earlier, Novogradac is not raising this analysis to disrupt the minimum wage conversations. However, it is an important discussion to be aware of and start thinking about the potential effects and how the affordable housing community should respond. State agencies may need to consider how this affects their deeper targeted units such as 30% and 40% units. 

When and How Will the Federal Minimum Wage Impact HUD Income Limits

It is also worth noting that it will take several years for current year wage information to be incorporated within HUD’s AMI data. So, an increase for particular households would have a more immediate effect on income eligibility, but the effect of federal minimum wage increases on AMIs would take longer to be reflected.

First, it is important to understand a few things about HUD income limits.  HUD starts with the median income for an area.  If we remember our basic statistic courses, median in the middle of the dataset and not the average.  Therefore, how an increasing minimum wage will impact median income will depend on how much wage pressure the increasing minimum wage puts on the median income.  To illustrate what this means consider two different markets.

First is a market where the median income is $70,000 (per HUD the national median income is $78,500).  If the minimum wage is raised to $15 a four-person household with two minimum wage earners would earn $62,400.  It is likely that an increase in the minimum wage would result in wage pressure at households earning $70,000 and the median income in this area would like be affected by the increase in minimum wage.

Next is a market where the median income is $100,000. In this case, it is less likely that a household income of $62,400 would not have enough wage pressure to impact the wages of a four-person household making $100,000 a year.

Blog Graphic: When and How Minimum Wage Increase Would Impact Median Income
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Obviously, this is an oversimplification and there are many factors to consider, but it does illustrate how median income will be affected differently in different areas.

In addition to if an increase in the minimum wage will affect the median income, it is important to understand how long it would take this wage data to impact HUD’s calculation of median income.

When calculating median income HUD uses historic wage data from the American Community Survey (ACS).  The ACS data used by HUD is data that was collected three years prior to the HUD income limit year, meaning that for the 2020 income limits, HUD used the ACS data from 2017.  HUD does use CPI to trend the historical ACS data to the applicable income limit year.  What this means is that wage data collected by the ACS in 2025, the first year that the full $15 minimum wage would be implemented, would not show up in HUD’s calculation of median income until HUD FY 2028 income limits.

Conclusion

It bears reiterating that it is not foregone conclusion that the $15 per hour federal minimum wage increase proposal will be enacted. First of all, although the proposal has already attracted 146 House cosponsors and 38 Senate cosponsors as of Feb. 1, it is not yet clear that the proposal has the support of at least half of the House, not to mention 60 votes in the Senate. Even if the House did pass the proposal, it doesn’t appear likely there are at least 10 Senate Republicans that would vote for the proposal. As mentioned above, Democrats could attempt to pass the proposal under budget reconciliation, which would theoretically allow the proposal to pass only with Democratic votes, but even in that circumstance, it is not clear that all Senate Democrats and Sen. Angus King, I-Maine, would vote for the proposal. For example, Sen. Joe Manchin, D-West Virginia, a crucial swing vote on the COVID-19 relief reconciliation bill, has made it clear he does not support the proposal to increase the federal minimum wage as much as $15 per hour. He reportedly is open to increasing it as much as $11 per hour.