Yes, Save LIHTC, But It's Not That Great

 Not much in common (newsmax)

Not much in common (newsmax)

The big news this week is obviously centered on the American Health Care Act, but whether it passes or fails in the House, it has massive implications for affordable housing.  That’s because, as President Trump has made clear recently, the real focus of this administration is tax cuts, which will be on the agenda one-way or the other. As it stands, the proposed level of tax cuts would likely kill the Low-Income Housing Tax Credit (LIHTC) program, which has been the most successful vehicle for construction of affordable housing since it passed in 1986 by President Reagan.  That’s a bigger problem and these potential cuts prove why.

The LIHTC was a bi-partisan amendment, basically an afterthought, added to the overall Tax Reform Act of 1986 and was intended to create incentives for building multi-family rental housing.  The original tax reform kept with the long-standing bi-partisan support for homeownership that has wasted billions of taxpayer dollars on subsidizing middle-class and wealthy homeowners.  Rather than tackle this larger problem, LIHTC was designed to share some of the wealth with low-income Americans who were (and are) more likely to live in rental housing.

So perhaps it wasn’t the product of the most rational political landscape, but it has undoubtedly worked at building affordable housing.  A report last year for the 30th anniversary stated that over 2.7 million homes have been built (including over 100,000 units in New York over the last 10 years) which is an average of 90,000-95,000 units a year.  $100 billion of private capital has been allocated through the tax credit.  90% of federally identified “affordable housing” has been created by it over the last 30 years.

The LIHTC program works by pairing investors with affordable housing developers to offset some of the cost of new construction or rehabilitation. An affordable housing developer can find investors directly or, more commonly, through a broker that syndicates different projects into a single equity fund to spread the risk of individual projects.  This funding is usually a precursor to the developer securing traditional loans in the private market.

Tax credits are a pretty sweet deal for participants because, as opposed to a tax deduction, the credit is a dollar-for-dollar trade. This makes them really attractive, particularly to institutional investors.  Of that $100 billion invested, less than 10% came from individual investors.

Now you can see where a drastic reduction in corporate tax rates could kill this vehicle for affordable housing.  If the rates drop from 35% to 15% as the president has proposed, there will be a lot less incentive to park money in affordable housing construction.  There is already a notable decline in projects as firms wait to see what happens on the hill.  There is considerable doubt that the equity value of LIHTC will be worth it after these cuts.

This is, of course, assuming that the LIHTC survives to begin with – something that no one can really say.   Aside from the President’s proposed cuts to HUD in his “skinny budget,” the administration hasn’t been on record with any policy view towards LIHTC.  

It’s quite possible that the Trump Administration supports the idea of LIHTC, it is after all an immensely popular bi-partisan program, but could still manage to undermine it without making necessary improvements to maintain its investment incentive. There is already a bi-partisan plan floating around in Congress to strengthen the LIHTC, but it can’t account for the larger tax reform agenda and won’t move until that agenda takes shape.

Hanging in the balance is the $10 billion ‘affordable housing industry’ and millions of low-income Americans struggling to find or keep their homes.  We simply have no alternative policy tools at scale to impact affordable housing construction anywhere in the country.  Without more clarity on LIHTC, there is no national affordable housing policy.

The fact that we are currently in a crippling affordable housing crisis makes this lack of policy clarity nearly a criminal act.  Rents as a percentage of household income are at their highest levels since the 1960s.  Nearly 50% of Americans who rent are rent burdened – which means spending more than 30% of monthly income on housing.  Housing costs in our most productive urban centers are skyrocketing which is killing economic growth and mobility.  It’s estimated that the lack of affordable housing costs the American economy $1.6 trillion a year.

This shows that relying exclusively on the LIHTC to drive affordable housing policy is a catastrophic mistake for us as a society.  As successful as it has been in many regards, it has also failed in many more.

First, relying on tax policy to drive development policy is inherently unstable, as we’re currently seeing.  Too many variables can impact the relative value of a LIHTC fund to make this a long-term strategy in today’s political climate.  It only works as a policy in relation to other bad tax policy.

Second, relying on private market principles means developments are typically located where land is cheaper, which is rarely where affordable housing is most needed – whether in the local or regional sense.  It also relies on complicated AMI (average medium income) metrics that rarely create enough affordable housing for extremely low-income households.  Though the program’s output is impressive on first glance, these numbers have only made a small dent in the larger crisis as a result.

Third, the complexity of the LIHTC itself, coupled with other state-level requirements, drives up the overall cost of affordable housing relative to private development.  Some estimates suggest that it adds an additional 13% per unit on some projects.  This system counter-intuitively makes itself more expensive.

Many of these issues are by-products of other flawed policies or even good policies working against each other.  They are also the product of a flawed understanding of housing policy in general and what affordable housing is specifically.

Thoughtful people can disagree on how much the federal government should intervene in the housing market, and the LIHTC has in many ways been a rare success in bi-partisan policy making.  But the federal government already has a massive role in housing in the form of subsidizing homeownership to the tune of $135 billion a year.  We don’t really call it “intervention” or “subsidy” but that’s what our current policies do on a massive scale.  It’s so big we don’t notice it.

If we’re honest about how much we already subsidize homeownership as taxpayers, we can start to be more open to direct involvement in affordable rental housing.  Rather than asking the private market to jump through so many hoops, just to produce middling results, we should consider creating a direct federal program to construct affordable housing on the scale that we used to see during the Great Depression. 

That period saw direct investments in public housing with private sector help, which succeeded in building millions of units of housing in major urban areas. I’m not suggesting we repeat the mistakes of that period, but the commitment to building affordable public housing worked in doing so. As much as NYCHA, by far the largest public housing agency in the country, gets a bad rap, much of their portfolio exists as a result of these programs from 70 years ago. That’s a remarkable achievement.

It might seem radical to suggest creating a vast public market for affordable housing in today’s age, but it shouldn’t be.  It makes a lot more sense than quietly subsidizing millions of homeowners while driving up the cost of a flawed affordable housing strategy all in the midst of an unprecedented crisis. The status quo is obviously not working.  We need to think big again in this country.

30 years of some success through the LIHTC program hasn’t adequately addressed the affordable housing crisis philosophically or practically.  Maybe it’s time to dust off policies and thinking that has quietly been working for more than 70 years.