Expanding Affordable Housing: Tax Policy’s Role

Reforming the Low-Revenue Housing Tax Credit score and Enhancing Cost Recovery for Buildings is Important for Increasing Inexpensive Housing

Chairman Wyden, Rating Member Crapo, and distinguished members of the Senate Finance Committee, thanks for the chance to supply testimony on tips on how to enhance tax coverage to extend reasonably priced housing provide and serve working households. I’m Garrett Watson, Senior Coverage Analyst on the Tax Basis, the place I give attention to how we are able to enhance our federal tax code.

Immediately, I’ll advocate methods to enhance the low-income housing tax credit (LIHTC) to make sure it’s efficient at offering reasonably priced housing to low-income People. I can even focus on how broader enhancements to the tax code, corresponding to offering higher price restoration for residential buildings, can be an efficient method to develop the provision of reasonably priced housing.

Reforming the Low-Revenue Housing Tax Credit score to Assist Susceptible People

LIHTC is the biggest supply of reasonably priced housing financing in the USA, utilizing about $13.5 billion in forgone income annually on common. LIHTC has supported the development of greater than 3 million housing items since its creation in 1986 via 2020.[1]

LIHTC gives builders with transferable, nonrefundable tax credit for the development of housing developments, which embrace limits on tenant revenue and housing prices.[2]

We must always take into account three big-picture factors when evaluating the effectiveness of LIHTC as a device to assist working households and low-income households.

First, whereas LIHTC has helped develop housing affordability, the credit score’s administration might be improved. Extra detailed info must be supplied on the credit score’s effectiveness, as beneficial in a 2018 report by the Authorities Accountability Workplace (GAO).[3]

Notably, GAO recommends that policymakers designate an company to gather information to raised perceive challenge growth prices. Such information would assist inform future reform efforts, guaranteeing businesses impose limits on prices, root out fraud, and reform opaque and discretionary credit score allocation processes. The info we’ve to date has proven, for instance, that developments supported by the credit score are inclined to endure from higher-than-average development prices. A 2017 GAO research discovered that solely 30 % of allocating businesses on the state degree put limits on growth prices, doubtlessly undercutting the credit score’s effectivity.^[4]

Whereas the Division of Housing and City Growth (HUD) gives precious project-level information, further information corresponding to info on charges paid to builders and syndicators in addition to outcomes for properties and tenants over time can be precious for assessing LIHTC.[5]

Second, it is very important consider LIHTC’s broader coverage effectiveness earlier than contemplating choices to develop LIHTC. One space of concern is how a lot of the LIHTC’s profit goes to low-income households. A number of research have discovered that between one-third and three-quarters of the subsidy supplied by LIHTC go to low-income households, with the remaining accumulates to different stakeholders corresponding to builders and traders.[6]

Equally, LIHTC initiatives are usually positioned in higher-poverty neighborhoods, depriving tenants of the advantages of dwelling in locations with extra alternatives and facilities.[7][8]

Lastly, lots of LIHTC’s administrative challenges are rooted in utilizing the tax code to deal with necessary social issues which may be outdoors the right scope of the tax system. The array of applications supporting housing, starting from federal grants, tax credit for historic rehabilitation, and tenant-facing help, all overlap with LIHTC each in coverage objectives and benefiting stakeholders. That overlap makes it more durable to guage the effectiveness of the credit score in comparison with alternate options, corresponding to housing vouchers, an choice thought-about by the Congressional Funds Workplace way back to 1992.[9]

Whereas it is very important take into account choices to enhance LIHTC’s administration, oversight, and effectivity, many challenges might be resolved by reconsidering whether or not the tax code is particularly the very best place to help housing initiatives and low-income tenants.

Professional-Development Tax Coverage as a Instrument to Broaden the Provide of Inexpensive Housing

Along with reforms to LIHTC, a supplementary method to increasing the provision of reasonably priced housing is to scale back the tax burden on funding in housing. One method to scale back the tax burden is bettering the price restoration of buildings within the federal tax code.

At the moment, traders in residential buildings should depreciate buildings over durations as much as 27.5 years lengthy, limiting the financial worth of the depreciation allowances. Ideally, all investments can be absolutely and instantly deducted from taxable income, however this could pose a problem for buildings that create a internet working loss for traders given the big measurement of the funding.

One resolution is to supply impartial price restoration, which adjusts depreciation deductions to take care of their worth in actual phrases. This could enhance the financial incentive to put money into buildings, increasing housing provide, whereas additionally avoiding challenges posed from absolutely expensing such giant investments.

In response to the Tax Basis’s estimates, offering impartial price restoration to residential buildings would result in the development of as much as 2.3 million housing items in the long term, decrease development prices by about 11 %, and lift long-run financial output by 1.2 %.[10]

Pairing higher price restoration with efforts to enhance land use and zoning guidelines on the state and native ranges would enlarge the constructive impact of impartial price restoration.

Conclusion

Reforming LIHTC and offering impartial price restoration for residential buildings would deal with the issue of housing affordability in a complementary style. Impartial price restoration expands housing provide and lowers prices of development and rents, which might help LIHTC fund extra below-market-rate initiatives.

These reforms are two necessary steps that policymakers can take to make sure the federal tax code just isn’t a barrier to fixing America’s reasonably priced housing problem.

[1] U.S. Congress, “Estimates of Federal Tax Expenditures for Fiscal Years 2022-2026,” Joint Committee on Taxation, Dec. 22, 2022,  https://www.jct.gov/publications/2022/jcx-22-22/. See additionally Mark P. Keightley, “An Introduction to the Low-Revenue Housing Tax Credit score,” Congressional Analysis Service, Jan. 6, 2023, https://sgp.fas.org/crs/misc/RS22389.pdf and Division of Housing and City Growth, Workplace of Coverage Growth and Analysis, “Low-Revenue Housing Tax Credit,” June 5, 2020, https://huduser.gov/portal/datasets/lihtc.html.

[2] Everett Stamm and Taylor LaJoie, “An Overview of the Low-Revenue Housing Tax Credit score,” Tax Basis, Aug. 11, 2020, https://taxfoundation.org/low-income-housing-tax-credit-lihtc/.

[3] Daniel Garcia-Diaz, “Low-Revenue Housing Tax Credit score: Improved Knowledge and Oversight Would Strengthen Price Evaluation and Fraud Danger Administration,” Authorities Accountability Workplace, September 2018, https://gao.gov/assets/700/694541.pdf.

[4] Michael Eriksen, “The Market Worth of Low-Revenue Housing Tax Credit,” Journal of City Economics 66:2 (September 2009), 141–49 and Garcia-Diaz, “Low-Revenue Housing Tax Credit score: Improved Knowledge and Oversight Would Strengthen Price Evaluation and Fraud Danger Administration.”

[5] Congressional Analysis Service, “The Low-Revenue Housing Tax Credit score: Coverage Points,” Oct. 17, 2019, https://crsreports.congress.gov/product/pdf/IF/IF11335.

[6] Ed Olsen, “Does Housing Affordability Argue for Subsidizing the development of Tax Credit score Initiatives?,” American Enterprise Institute, March 24, 2017, https://www.aei.org/wp-content/uploads/2017/07/Ed-Olsen-AEI-Housing-Affordability.pdf and Gregory S. Burge, “Do Tenants Seize the Advantages from Low-Revenue Housing Tax Credit score Program?,”” Dec. 1, 2010, https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6229.2010.00287.x.

[7] Congressional Analysis Service, “The Low-Revenue Housing Tax Credit score: Coverage Points.”

[8] A associated coverage concern is to what extent LIHTC crowds out growth that may have occurred absent the credit score: a 2005 research discovered that 30 to 70 % of LIHTC-supported housing would have been constructed with out this system, a discovering echoed by a separate 2010 research figuring out related displacement of personal development.

[9] Congressional Funds Workplace, “The Price-Effectiveness of the Low-Revenue Housing Tax Credit score In contrast with Housing Vouchers,” April 1, 1992, https://www.cbo.gov/publication/16375.

[10] Erica York, Alex Muresianu, and Everett Stamm, “Estimating Impartial Price Restoration’s Affect on Inexpensive Housing,” Tax Basis, Aug. 7, 2020, https://taxfoundation.org/estimating-neutral-cost-recoverys-impact-on-affordable-housing/. See additionally Erica York, “Choices for Enhancing the Tax Therapy of Buildings,” Tax Basis, Might 19, 2020, https://taxfoundation.org/neutral-cost-recovery-for-buildings/.