Reduce the Basic Allowance for Housing to 80 Percent of Average Housing Costs

Background

Housing allowances are one component of military compensation. The amount provided varies by a service member's rank, location, and whether he or she has dependents. The Department of Defense (DoD) provides those allowances to ensure that eligible personnel and their families have access to affordable quality housing.

Three types of housing are available to service members: government-owned housing (quarters or family housing), housing on military bases operated through long-term contracts with DoD (privatized housing), and housing in the local civilian market. Unmarried service members with fewer than four years of service are typically required to live in barracks, but more senior personnel and service members with dependents can choose among the three types of housing. About 60 percent of service members live in privatized or local housing.

If government-owned military housing is not available (which is typically the case, because it is very limited), service members are provided a Basic Allowance for Housing (BAH) to offset most of their costs for rent and utilities. Because those costs vary by location, the BAH rate varies by locality; the amount provided is based on rents in the local housing market. The housing allowance is not subject to federal (and, in many cases, state) income tax.

In the mid-1990s, to improve the quality of military housing, management of those facilities was transferred from DoD to private-sector developers through the Military Housing Privatization Initiative (MHPI). BAH is the primary source of income for that program. As of 2018, nearly all family housing on military bases in the United States was managed by private-sector developers.

In the early years of the MHPI program, BAH compensation was set to cover about 80 percent of service members' rental and utility costs, on average. That share was consistent with DoD's long-standing policy of compensating service members who live off-base. In 2001, BAH was increased so that it would cover, on average, 100 percent of a service member's expenses for housing and utilities by 2005. (That change was part of the Secretary of Defense's efforts to improve service members' quality of life.) The Congress partially reversed that policy in the National Defense Authorization Act for 2016, authorizing DoD to lessen BAH to 95 percent of average housing costs.

Option

This option would reduce BAH by 1.7 percentage points in January of each year starting in 2020. BAH would not change for service members until they moved. As a result, by 2028, BAH would once again cover 80 percent of rental and utility costs. This option would affect discretionary spending by DoD and would also affect mandatory spending by the Department of Veterans Affairs (VA), because the housing benefit that VA provides as part of the Post-9/11 GI Bill is tied to BAH rates.

Effects on the Budget

In 2017, about 14 percent (or $20 billion) of DoD's $139 billion military personnel appropriation was for BAH. If implemented, this option would save about $15 billion in discretionary spending and nearly $5 billion in mandatory spending from 2019 through 2028, the Congressional Budget Office estimates.

CBO's estimate reflects the size and composition of DoD's forces for fiscal year 2019 (as indicated in the President's 2019 budget). CBO projects that service members would move every three years, on average, and that their moves would occur uniformly throughout the year. Because of those factors, in combination with the specifications of the option, the savings in both budget authority and outlays would lag behind reductions in the BAH rate. Because of that lag, savings would continue to increase until 2031—peaking at nearly $5 billion—and would grow with inflation thereafter.

Housing costs used to calculate the BAH rate are composed of the median rent plus average utility costs and are determined from market data for approximately 300 military housing areas in the United States, including Alaska and Hawaii. If housing costs deviated significantly from expectations, savings under this option would differ as well.

If the BAH was changed by more or less than 1.7 percentage points per year, the savings under this option would grow or shrink proportionately. For example, increasing the annual rate of reduction to 3.0 percentage points per year would result in proportionately higher savings by 2028.

Other Effects

One advantage of this option is that it would slow the growth of military pay, which would move cash compensation for military personnel closer to the 70th percentile of compensation for civilians with comparable education and years of experience (DoD's goal). Currently, cash compensation for a majority of military personnel is at about the 90th percentile—that is, regular military compensation (RMC) is higher than the compensation of 90 percent of all comparable civilians. (DoD uses RMC as the measure of cash compensation for military personnel; that calculation adjusts for the fact that BAH and the basic allowance for subsistence are not taxed.) Gradually reducing BAH below local market costs would not reduce total compensation below current levels, however, because military pay raises and the costs of rental housing are expected to continue to rise.

A second advantage of this option is that reducing BAH might have only a small effect on the nominal (not adjusted for inflation) value of a service member's compensation. Because BAH is not taxed at the federal level, under this option it would cover more than 80 percent of housing costs—and perhaps as much as 90 percent to more than 100 percent for many service members, depending on their marginal rate for federal income taxes. The value could be somewhat higher for military personnel who live in states that also do not tax the allowance.

One disadvantage of this option is that slowing the growth of military compensation by reducing the BAH rate might affect DoD's ability to retain military personnel. The extent of that effect would depend on the strength of the U.S. economy and other factors in future years.

A second disadvantage is that reducing BAH below local market costs would limit the housing choices available to service members. Those living in the local community would have to pay more out of pocket or find less expensive housing. But those living in privatized government housing would be shielded from the decreases in BAH because current policies allow developers to charge no more than the local BAH for rent and utilities. That disparity would probably boost demand for government housing, although it is already near capacity.

Under current policies, reducing the BAH rate would also decrease the income of the private-sector developers who provide housing on military installations. Lowering the BAH rate further, to 80 percent of market prices in the area, would reduce their income from current levels unless policies changed and those service members were required to pay a portion of their rent out of pocket (as is the case with service members who live off-base and are reimbursed at 95 percent of their estimated average housing costs).

Although this option would reduce income, providing housing on military installations may continue to be profitable for private-sector developers, who entered into contracts to build and manage their facilities when BAH rates were much closer to those that would be in effect under this option. In addition, private-sector developers receive several other benefits—help in financing their investment, very high demand, and few marketing costs—all of which providers of off-base housing do not.

The experience of private-sector developers under the reduction of the current BAH rate from 100 percent in 2015 to 95 percent by 2019 has yet to be fully studied. A 2018 analysis from the Government Accountability Office found that DoD needs to improve the consistency of the information it provides to better assess that experience.

Developers of private-sector housing have already asked the Congress to help preserve their income as BAH rates decline to 95 percent. The latest defense authorization bill (for 2019) requires DoD to provide 5 percent above the prescribed BAH rate for that purpose. This option incorporates the assumption that developers would not receive supplemental funding to offset further reductions in BAH rates.