How tax reform could devastate the affordable housing market

American Banker
By Kate Berry
November 14 2017

Housing advocates are pressing Senate Republicans to expand the low-income housing tax credit program while pushing back against a House GOP plan that would eliminate financing for half of all affordable housing units.

The efforts underscore a key issue with the tax proposals currently being rushed through Congress.

Lowering the corporate tax rate to 20% from 35% would reduce the value of existing low-income tax credits at a time when there is both a rental housing crisis and a shortage of affordable housing.

Advocates said they are cautiously optimistic that Congress will reverse course to help.

“We are not a target; we are one of the unintended consequences,” said David Gasson, executive director of the Housing Advisory Group and a vice president and director at Boston Capital. “We are watching what happens when the two bills go to conference. Right now we are advocating for a whole credit program because the lower corporate rate dilutes the value of the tax credits.”

The affordable housing market relies heavily on subsidies from two separate programs: the low-income housing tax credit program, and private activity bonds that allow states and cities to borrow on behalf of private companies and nonprofits to lower their borrowing costs.

The House GOP plan calls for gutting the private activity bond program, which would raise $38.9 billion over 10 years to help lower corporate and individual tax rates.

The Republican tax proposals come as bank regulators and lenders have a heightened interest in affordable housing because rents have skyrocketed in major cities across the country. More than half of renters spend more than 30% of their household income on rent, according to the Federal Reserve Bank of Richmond. Roughly 19 million households pay more than 50% of their income on rent, according to Harvard’s Joint Center for Housing Studies.

The House plan “would be a devastating reduction in the amount of affordable housing that is developed and preserved,” said Richard Goldstein, a partner at Nixon Peabody.

He estimated that eliminating private activity bonds would reduce the supply of affordable housing units by 900,000 over 10 years.

The bonds have come under attack largely because they are used to finance a wide range of projects, including professional sports stadiums and privately run businesses like toll roads.

But the House plan is getting resistance from some Republicans because it goes against President Trump’s $1 trillion infrastructure plan announced earlier this year. Businesses typically use tax-exempt private activity bonds to finance airports, hospitals, charter schools and multifamily apartment projects.

Moreover, private activity bonds have become more popular as demand for low-income housing tax credits has increased.

“We need to focus on ways to incentivize affordable housing, not just low-income housing, which is obviously needed, but workforce housing as well,” Sen. Alan DeBoer, R-Ore., said at a Senate Finance Committee hearing in September. “And we shouldn’t lose sight of that. I don’t have any solutions to share with you, but it is certainly a growing and troubling problem. And as we go forward, that part of our nation has to be included in whatever is done in economic growth.”

Rafael Cestero, president and CEO of the Community Preservation Corporation and former commissioner of New York City’s Department of Housing Preservation and Development, said the House GOP’s elimination of the bond program would cut $2 billion of financing a year just in New York state, eliminating the creation of 18,000 affordable homes.

“There’s been bipartisan support for private activity bonds for my entire lifetime in this business,” Cestero said. “There is no way for New York state or New York City to make that up. Given the change in our housing market and the fact that we have an increasing number of renters, this is not just a coastal blue-state issue; this is an issue that plays out across the country.”

Senate plan

Under both bills, the corporate tax rate would be reduced — a big issue because it would reduce the tax loss benefits from low-income housing tax credit investments.
But the Tax Cuts and Jobs Act tax legislation introduced by Senate Finance Committee Chairman Orin Hatch, R-Utah, is more favorable than the House version because it preserves private activity bonds.

Still, by lowering the corporate tax rate, the Senate plan would reduce the development of affordable rental housing by nearly 300,000 homes over 10 years, according to an analysis by Novogradac & Co.

“From a public policy perspective, we are looking at the impact on the number of housing units produced and that number will go down with a lower corporate rate,” Goldstein said. “We’re working with Congress to suggest some ways which we think should have little or no budget impact of fixing the corporate rate issue — and that gets pretty technical, but basically it would substitute some additional credits to make up for the reduction in [corporate] losses.”

Still, a proposed fix underscores how the tax code can become even more complex.

Housing advocates have come up with a two-step proposal to increase tax credits and modernize the credit percentage formula, which has not changed since the program was created in 1986.

With tax reform a moving target, housing advocates said they are hoping to show how severe the affordable housing crisis is.

“Democrats and Republicans need to be talking about affordable housing more given the nature and severity of the crisis,” Goldstein said. “It’s disappointing when at best we will come out of this tax reform bill with the status quo to address a problem that is getting worse and worse.”