Work disincentives in public housing

September turned out to be Social Housing Month here at the Brown Couch, but there was nary a chart nor graph to be seen. This cannot be allowed to stand, so here are a few about the rent rebate system in public housing, and how Housing NSW's policy for charging rent at a higher rate for so-called 'moderate income' tenants contributes to massive work disincentives.

A couple of explanations first. Work disincentives are costs or conditions that discourage persons from increasing their incomes through work – in other words, where you would keep so little of your increased income for yourself that it is not really worth the effort of increasing it. There's rather a lot of talk about work disincentives generated by the tax and social security systems, but they are generated by housing assistance too, particularly public housing, because public housing's income-related rents mean that if you were to increase your income, a bit of that increase would go to Housing NSW in rent.

One way of measuring work disincentives is to think of them in terms of effective marginal tax rates (EMTRs). EMTRs express, for a person on any given income, how much of an additional dollar of income would go to tax, social security withdrawal and, in public housing, rent and water charges. EMTRs of more than 60 per cent are considered high. It's worth remembering too that the top marginal income tax rate in Australia is 45 per cent.

As for the moderate income rents policy: as Brown Couch readers know, most public housing tenants pay rents that are rebated to 25 per cent of their household incomes. In 2005, Housing NSW introduced higher rates for tenants whose household income fell between two threshold amounts - Housing NSW set the amounts, and called the band between them 'moderate incomes'. These higher rates ranged, on a sliding scale, from a titch over 25 per cent at the bottom of the band, to 30 per cent at the top of the band (so, if your income was in the middle of the band, your rent rate would be 27.5 per cent).

That might not sound like a big deal, but those moderate income rent rates are not marginal rates, like the ATO's income tax rates: they apply not just to that portion of your income in the moderate income band, but to the whole of your income. If you expressed the moderate income rent rates as a marginal rate – ie how much of the portion of your income that falls in the moderate income band goes in rent – it is about 50 per cent. In other words, 50 cents in every additional dollar of income in the moderate income band goes to Housing NSW in rent.

Now the graphs, which show the combined effect of income tax, social security payment withdrawal, the Medicare levy and public housing rents and water charges in terms of EMTRs for three typical public housing households. (But, before we do, a qualification: these graphs are based on numbers crunched by the TU this time last year, and since then the tax and social security elements will have changed a bit. The general picture provided, though, is still about right.)

First, let's consider a single person in public housing (let's call him Andy) who has a disability and who works part-time (ie Andy's income is the Disability Support Pension plus wages). Here are the EMTRs Andy faces if he should increases his income through additional work. We're really interested in what happens in the moderate income band: here EMTRs range between 85 and 109 per cent. If it were not for the moderate income rents policy, he'd face lower EMTRs of 56 to 76 per cent.

(Click on the image for a better view)

We can make this clearer by embellishing Andy's story a little. Say Andy works 3 days per week as a caseworker in a community centre. At award rates these wages, plus his (reduced) DSP, will put him just below the moderate income band. The community centre offers Andy more hours and hence more wages, but this will put him in the moderate income band. If he does an additional 14 hours, he'd be paid an additional $320, but the additional tax, social security withdrawal and rent add up to an EMTR of 85-86 per cent on each of his additional dollars. (If he did even more hours, he'd hit an EMTR of 91 per cent, rising up to 109 per cent near the top of the moderate income range.) So Andy would get to keep about $48.50 for two days work. Thanks, but no thanks.

Next, the EMTRs for a single parent (Beth) with two kids. She faces EMTRs ranging from 81 to 103 per cent over the moderate income range. But for the moderate income rents policy, she would face EMTRs of 57 to 74 per cent.

(Click on the image for a better view)

To embellish again: say Beth receives Parenting Payment (Single), plus Family Tax Benefit A and B, plus wages from working casually three days per week in the local library. This income would place her in the middle of the moderate income band. Now say she's asked to work another day a week. At casual award rates, the additional wages are subject to EMTRs of 92-103 per cent. If she works the additional day, she'd end up being about one dollar worse off - and that's before you consider the cost of child care. Beth politely declines.

Finally, let's consider a young worker (Cass) in a household of multiple adults (mum, dad and brother). She faces EMTRs that bounce around between 43 per cent and 78 per cent – generally lower rates than our other two cases, but note that they cut in at much lower incomes than in the other cases. But for the moderate income rents policy, her EMTRs would be between 16 and 60 per cent.

(Click on the image for a better view)

To embellish: Cass has just left school, and works Thursday nights and Saturdays in a shop, while mum and dad care for her disabled brother. Cass's fortnightly wage is just $277 but, with her (reduced) Youth Allowance, and two lots of Carer Payment and Carer Allowance and the DSP, the family's household income is just under the moderate income band. Cass's boss wants someone to do another shift each week. If she picks them up, Cass proposes to pay the increased rent (strictly speaking, under the moderate income rents policy a young person's share of the rent continues to be calculated according to a concessional rate, and it is the other adults in the household who cop the higher rates, even though their own incomes have not changed. Cass is doing the decent thing here). This means she'll face EMTRs of 71-78 per cent on her additional earnings. This works out to an hourly rate of pay between $2.44 and $3.21. Cass decides not to ask for the additional shifts.

Two conclusions from all this. One is straightforward: the moderate income rents policy should be scrapped because of the way it contributes to some extraordinarily high work disincentives.

The second is more tentative: what are the implications of a work disincentive analysis for income-related rents generally? The usual 25 per cent rent rebate rate contributes to EMTRs too, but on the other hand, there is something fair about the proposition that those who earn more should pay more. Dr Henry has flagged that this is something he's thinking about in his review into the future of Australia's tax and transfers system - and those of us who are interested in the future of social housing should be thinking about it too.