By: Jeffrey A. Whiting & Richard S. Goldstein
It’s easy to criticize Congress. Admittedly, we all do and as Americans we have been doing so since the first Continental Congress. In the aftermath of the drama we all just witnessed regarding the debt ceiling, the end result was that very little was accomplished other than, well, raising the debt ceiling and having a new committee try to make the hard choices.
But in 1986, after years of failed housing programs designed to provide affordable housing for low-to-moderate income families, Congress passed, and President Reagan signed, the Tax Reform Act of 1986. That legislation created the low income housing tax credit (the Affordable Housing Credit) for affordable rental housing and ushered in the “most successful affordable housing production and preservation program in the nation’s history” as summarized by the highly respected Joint Center on Housing Studies for Harvard University.
So how did Congress get this right?
Perhaps there were more adults in the Administration and Congress in 1986, individuals such as Ronald Reagan, Tip O’Neill and George Mitchell, who could put partisan ideology aside and create effective legislation from academic policy. The Affordable Housing Credit was created through a bipartisan collaboration between Republicans and Democrats. That’s right: at one point in our not-too-distant past, Republicans and Democrats actually worked together to create legislation that was effective and efficient.
The Affordable Housing Credit is unique in the tax code and is significantly different from many other tax credits or tax expenditures. Other tax credits go to and benefit the actual business generating the credit. In other words, those credits benefit the business for doing what they are in business to do. Understanding that all such credits have their advocates, we are not attempting to argue for or against such tax expenditures. Our effort here is to provide a distinction rather than rain on anyone’s parade.
The true beneficiaries of the Affordable Housing Credit are not the investors or developers of affordable rental housing, but rather the residents of the housing developments. The residents, whose incomes must qualify as low income, benefit by reduced rent. It is critical to distinguish the difference between rental reduction and rent subsidy such as various housing programs administered by the Department of Housing and Urban Development (HUD).
Although the Affordable Housing Credit is highly effective in leveraging such HUD programs for subsidized housing (another ancillary benefit and distinction), its true strength lies in providing affordable housing for working individuals and families such as first responders, teachers and service workers. It helps those people live in the communities where they work—wouldn’t you prefer to have your police and fire fighters living nearby?
For 25 years the Affordable Housing Credit has created a unique and successful public/private partnership. The partnership between private developers (some of whom are non-profit organizations), investors and the state housing agencies that are responsible for administering the program has nationally created over 2 million affordable housing units. In addition, the program creates about 150,000 good jobs annually in the construction trades and in other sectors such as property management firms. In the United States this year, approximately $650 million of these federal tax credits will be awarded that will generate nearly $7 billion of new construction and renovation and will provide for about 100,000 affordable rental homes. In addition to jobs, the residential rental units created by the Affordable Housing Credit generate over $2.4 billion in taxes for local communities. Affordable housing policy and local communities have never been so well served by any other program.
Perhaps the ultimate differentiation of the Affordable Housing Credit compared to any other federal tax credit is the complete transfer of risk from the taxpayer to the private sector. Statistics are nice, but the reality is that under this program housing policies are implemented at the local level by state housing agencies and the ultimate risk of failure is borne by private investors. It is the private investors that bear the financial risk of a failed development, not the US Government which, as we now know from TARP and other governmental bailouts, is ultimately the US taxpayer. And the truth is that unlike what we have witnessed in the single family mortgage markets, rental developments financed with the Affordable Housing Credit have remarkably low rates of foreclosure—less than 0.1%–according to Ernst & Young. That is due to the success of the public/private partnership in overseeing the development and operation of these properties.
Yes, Congress actually got something right.
Notwithstanding this success, the Affordable Housing Credit is now in jeopardy of being eliminated by the Sirens song for tax reform. And like the Sirens of Greek mythology that lured sailing victims to rocky shores and ultimate destruction, this song by tax reformers in Congress is dangerous and fatal to those who listen if applied without regard to the success of the programs being destroyed. A “broad brush” approach to simplifying to the tax code is neat and tidy for the entertainment-fueled media and caffeinated political activists, but it is poor public policy.
Yes, it sounds good to slash government programs with a machete and a static economic analysis of federal programs. But a deeper look into housing policy requires an understanding of the dynamic economics of the Affordable Housing Credit and the need it addresses. As noted above, this program creates good jobs; at 9.1% unemployment, we need every job we can get. In addition, a recent analysis by Novogradac & Company, a respected CPA firm based in San Francisco, concluded that should Congress eliminate the Affordable Housing Tax Credit, the marginal corporate tax rate would be reduced from 35.00% to 34.90%. That’s right, the elimination of over 150,000 jobs annually and more than $7 billion of construction would reduce federal tax rates by a whopping one-tenth of one percent.
Okay, the program works, but do we really need more affordable rental housing? The answer is an emphatic Yes. The need for affordable rental housing is critical and growing. The Harvard Joint Center found in a report released earlier this year that stated,“…the share of US households unable to find affordable rentals has been on the rise for a half-century, with an especially large jump in the last decade as renter income fell even further behind housing and utility cost increases… Rental markets are now tightening, with vacancy rates falling and rents climbing.” Moreover, the percentage of moderately and severely cost-burdened renters (those paying more than 30% and 50% of income for housing, respectively) has climbed to an astonishing 75% in total.
So, here is a program that has bipartisan support from Democrats and Republicans, a proven track record of success, creates jobs and addresses a critical need. The Affordable Housing Credit deserves its place in the tax code and as part of our national housing policy. Whatever Congress decides to do with the tax code, it should recognize that when they create successful programs, they should be maintained, not eliminated.
Jeffrey A. Whiting is CEO of City Real Estate Advisors, Inc., an Indianapolis based real estate finance firm specializing in affordable multi-family housing. CREA has offices in Boston, MA, Austin, TX, and Portland OR and invests private equity for the creation of affordable housing throughout the United States.
Richard S. Goldstein is a partner in the Washington, DC office of Nixon Peabody LLP, specializing in Affordable Housing Credit transactions. He also serves as general counsel to the Affordable Housing Tax Credit Coalition, a trade association based in Washington, DC that advocates on behalf of that program.