Affordable Housing Shortage Expected to Worsen Under New Tax Law
Congress indirectly diluted the tax incentives for building affordable housing -- a change that's predicted to result in a quarter of a million fewer units.
Even before Congress passed a $1.5 trillion tax cut in December, the demand for affordable rental housing far exceeded the supply. For every 100 renters who fit the federal government’s definition of “extremely low income,” only 35 units were available.
Congress offers some money for people who can't cover the full cost of rent, but that, too, is inadequate: A recent study found that federal housing assistance goes to fewer than one in five of those who qualify.
Now, because of the new tax law, the affordable housing shortage is expected to get worse.
By one estimate, developers will build nearly 235,000 fewer affordable rental units in the next decade. The reason? Congress diluted tax incentives that fueled the construction and rehabilitation of low-cost rental housing.
"Considering how severe the affordable housing shortage is already, it’s moving in the wrong direction," says Sarah Mickelson, senior director of policy at the National Low Income Housing Coalition.
The primary way that all levels of government (federal, state and local) facilitate the production of affordable housing is through the federal Low Income Housing Tax Credit, which Congress created in its last major tax package under President Ronald Reagan. Between 1995 and 2015, the tax credit spurred the creation of more than 2 million affordable housing units, according to the U.S. Department of Housing and Urban Development (HUD).
The Tax Cuts and Jobs Act that Congress passed just before Christmas, however, makes that tax credit less attractive. Now that the corporate tax rate is only 21 percent (down from 35 percent), affordable housing investors (which are mostly banks) will owe significantly less in taxes and have less of a need to buy tax credits from developers.
The effect was visible even before the law passed.
Housing finance experts attribute last year’s drop in the average price per credit to the election of Donald Trump. They say the market was already anticipating that Congress would overhaul the tax code and thus reduce the credits' value to banks. As the price drops, the credits become less helpful to developers who are trying to raise money from private investors for affordable housing projects.
In 2016, the average monthly price of a credit ranged from $1.01 to $1.06, according to Novogradac & Company, a national accounting firm. But from February through November of 2017, it ranged from 91 cents to 93 cents. In December, the price dropped again to 89 cents.
The diminished tax credit could be the beginning of more federal changes that would worsen the affordable housing shortage.
For example, the White House budget released this month calls for a 14 percent reduction at the U.S. Department of Housing and Urban Development and the elimination of the Community Development Block Grant program and the HOME Investment Partnership Program -- two block grants that help state and local governments build affordable housing. The White House has also asked Congress to allow work requirements for federal housing assistance programs, which would limit the number of low-income people eligible for rental aid.
The White House budget, in its own words, “devolves responsibility to State and local governments, which are better positioned to assess local community needs and address unique market challenges.”
To justify those and other cuts to government programs, the Trump administration cites the $1.5 trillion that the GOP tax law will add to the national debt.
Both the tax law and the White House budget come at a time when city officials say they need more affordable housing, not less.
"City leaders are really feeling like the federal government is not living up to its obligation under these proposals," says Michael Wallace, who oversees federal advocacy for the National League of Cities.
The best foreseeable hope for sweetening the value of the housing credits comes in March, when Congress faces a deadline to pass a long-term spending plan. An early version of the short-term spending deal passed in February included provisions from a bill last year that would have increased the size of the credit, but it wasn't included in the final deal.
The bill, however, had bipartisan support. It was sponsored by U.S. Sen. Maria Cantwell, a Democrat from Washington state, and supported by Utah Republican Sen. Orrin Hatch, the chairman of the Senate Finance Committee. If Congress doesn't enhance the tax credit in the March budget deal, affordable housing advocates will continue to push for some kind of legislative fix.
“We have to figure out how to make Low Income Housing Tax Credits more attractive again," says Wallace.