The low-income housing tax credit (LIHTC), an essential tool in addressing the nation’s housing crisis, must be considered as Congress begins its tax reform efforts, stressed a key lawmaker.
The LIHTC program is a key part of the tax reform puzzle, said Ron Wyden (D-Ore.), ranking member of the Senate Finance Committee, who called the lack of affordable housing a “five-alarm fire across the country.”
During an Aug. 1 committee hearing on affordable housing, Wyden discussed how the longtime LIHTC can remain whole amid the upcoming efforts to overhaul the tax system.
“Reducing the corporate tax rate could reduce the value of the low-income housing tax credit and thus investor demand,” he said. “We’ve heard some talk about the credit declining by up to 17%.”
Wyden said he will concentrate on trying to make sure that issues like increasing the supply of affordable housing fit into tax reform and that “we don’t end up having an inadvertent problem as a result of say a reduction in the corporate rate and lowering the value of the credit.”
The hearing comes after Sen. Orrin Hatch (R-Utah), Finance Committee chairman, and Sen. Maria Cantwell (D-Wash.) have introduced legislation (S. 548) aimed at strengthening and expanding the LIHTC.
Their bill calls for a 50% cap increase in the annual housing credit phased in over five years.
“If we don’t increase the tax credit, how are we going to get out of this crisis?” Cantwell said during the hearing.
The bill also allows for “income averaging” at LIHTC developments. Currently, LIHTC units are reserved for residents earning no more than 60% of the area median income (AMI). The bill creates a new test that would allow the 60% of the AMI ceiling to apply to the average of the apartments within a property. The maximum income to qualify for any housing credit apartment would be limited to 80% of the AMI.
The flexibility provided by the income-averaging option is one of the most important LIHTC reforms, according to Katherine M. O’Regan, professor of public policy and planning at New York University's Robert F. Wagner Graduate Schooland faculty director of the Furman Center for Real Estate and Urban Policy. The proposal is expected to improve economic feasibility in different market settings and allow a LIHTC property to serve a broader set of incomes.
Some of the strongest testimony came from developer Granger MacDonald, CEO of the MacDonald Cos., a Kerrville, Texas–based firm that owns 4,700 affordable units in 41 developments across the state.
Chairman of the National Association of Home Builders board of directors, MacDonald said the number of renter households that are “severely cost burdened,” meaning they spend more than half of their monthly income on rent, is at an all-time high of 11.4 million.
“The first step in solving this crisis is to pass S. 548, the Affordable Housing Credit Improvement Act of 2017,” he said, noting that the legislation is expected to result in an additional 400,000 affordable homes over 10 years, construction activity that will increase the federal tax revenue by $11.4 billion.
To get to the root of the crisis, it’s necessary to look at the challenges faced by developers, according to MacDonald. “There’s no magic wand to erase basic development costs,” he said. “Fees, regulatory compliance, modern building and energy codes, building materials, land and labor costs determine what rents are needed to make a project viable. The bottom line is if we want to increase the supply of affordable rental housing for lower-income households, it is financially impossible to do without the tax credit.”
He addressed the criticism that the program has not directed more housing to higher-income areas. In Texas, developers do not receive a LIHTC allocation without the blessing of the local community.
“In many higher-income areas as soon as you utter the word ‘affordable,’ the discussion often turns ugly and may take on racial overtones,” MacDonald said. “This is the reality affordable housing developers face every day.”
S. 548 seeks to prohibit states from requiring special local approval of LIHTC developments. “This will ensure if the zoning allows it, an affordable project will be treated just like any other development,” he said.
Development costs also continue to be a major issue. As part of a series of reports on the LIHTC program, the Government Accountability Office (GAO) is examining the costs. It expects a report out early next year of its findings for LIHTC developments placed in service between 2011 and 2015 for 12 housing finance agencies, according to Daniel Garcia-Diaz, director of financial markets and community investment at the GAO.