Tax Reform and Affordable Housing

Dec 8, 2017

The news from Capitol Hill about the federal tax overhaul bills has focused, at least in the mainstream press, on the impact on the middle-class and corporations.

But one area of the bills that hasn’t received much attention matters greatly to the future of affordable housing in this country — the impact on tax credits that developers use to make building lower-income housing a manageable business expense.

The Republican tax bills do away with the New Markets Tax Credit (NMTC) and curtail the federal Low-Income Housing Tax Credit (LIHTC), which could be a huge blow to affordable housing projects.

At the time of this writing, the tax bills have passed the Senate and the House, but there remains the issue of working out the differences between the bills. For affordable housing, those negotiations carry a lot of weight, although no matter which part of the legislature wins out, affordable housing projects may still lose.

The House version, which passed in November, nixes the NMTC completely, according to the National Real Estate Investor, and curtails a bond program that’s key to the success of LIHTC as a way to spur the development of affordable apartment buildings. The bond program’s no-interest borrowing, and the fact that investors can earn interest that’s not taxed, has proven key to encouraging for-profit developers building projects for the lower end of the income market. Developers can fund their projects by selling the bonds to investors, who reap the tax credits.

One expert, writing in the The Salt Lake Tribune, predicts that the House version of the tax reform bill would cut affordable housing building by 50 percent.

“The cost to finance affordable housing borne by the current tax code is an investment in valuable lives and families, better housing for our growing population of seniors and the preservation of existing housing stock,” Grant S. Whitaker, the president of the National Council of State Housing Agencies.

Novogradac & Company, an accounting firm, estimates the affordable housing rental development production supported by LIHTC could dip by up to two-thirds, with more than 800,000 affordable units under LIHTC vanishing within 10 years.

As one developer recently told the investigative magazine Mother Jones, “This credit is the only significant production program for affordable housing in the country… Affordable housing is a layer cake. It is not unusual to close a project with six, seven, eight sources of funding. But the tax credit is almost always going to be the biggest one.”

The Senate version, Mother Jones notes, isn’t as bad, as it keeps the tax-exempt status on the so-called private activity bonds. But, the magazine notes, there are still issues with a potential negative trickle-down effect when it comes to lower corporate taxes (and therefore less incentive for developers looking to trim their tax burdens).

If the tax reform becomes law without any addition programs to support the construction of affordable housing, developers are more likely to struggle with financing affordable housing. That means more market-rate apartments. It’s the kind of trickle-down effect that could leave a lot of hard-working lower-income families out in the cold.