By: Jeffrey A. Whiting, CEO & President
There are numerous examples through recent news articles that highlight the impact of potential tax reform on the production and preservation of affordable rental homes financed through the Low-Income Housing Tax Credit (Housing Credit). These articles accurately reiterate the well-documented and increasing challenges of affordable housing in America. The delicate balance between federal tax and housing policy brings to light how the expected decrease in corporate tax rates has led investors to stop or slow investments in affordable housing.
However, many of them inaccurately infer a problematic narrative in which affordable housing advocates are against tax reform. Tax reform in and of itself is not necessarily bad for the Housing Credit and has potential to be positive for all parties. This is especially the case for its true beneficiaries: the millions of veterans, seniors, working families, individuals with special needs and other residents who live in affordable housing.
Advocates must reinforce this message with the Administration and Congress. We are committed to working with them to protect and strengthen the Housing Credit throughout tax reform, with an eye on at least maintaining current production levels to keep America’s housing affordability challenges from further harming our economy, communities and families.
It is important to note that creating and preserving affordable housing nationwide is almost solely dependent upon private capital investing in the Housing Credit. America’s most successful tool for encouraging private investment in affordable housing, the Housing Credit, is responsible for nearly all of the affordable housing built and preserved since the program was authorized under President Reagan in the Tax Reform Act of 1986.
No matter how socially or community-minded, private capital is, upon final analysis, accountable to shareholders and a required return on investment. This is a key part of how the Housing Credit works: private capital is held accountable to both its shareholders and to the federal government regarding the implementation of federal affordable housing policies.
The Vagaries of the Real Estate Market and Private Capital
The current dislocation in the Housing Credit market is likely temporary. Recently, Housing Credit stakeholders have been lulled by the sirens song that Housing Credit pricing will only rise. An old investment saying sums up the current market, “Markets go up in escalators and down in elevators.” The Housing Credit market is not immune to this axiom.
Pricing is the issue now. There is plenty of capital willing to invest in the Housing Credit. It is a proven investment with many of the largest financial institutions in America because of the private market discipline that investors require. Real estate risk management is but one aspect of Housing Credit pricing. Tax management has an interdependency in this asset class and when the value of the asset is impacted by expected marginal and effective tax rates, Housing Credit pricing changes. This is the beauty of capitalism and the markets regarding the Housing Credit. It is the transfer of risk from the federal government to the private sector, which governs the rate of return that investors require given the asset class. The price per Housing Credit is pure capitalism allocating risk. Nothing more – nothing less.
Tax Reform and the Tax Credit
Comprehensive tax reform is unimaginably difficult, including both corporate and individual tax policy. Members and staff of Ways and Means and Senate finance committees led by Kevin Brady and Orin Hatch, respectively, are working long hours on a tax code that is fair, economically positive and creates jobs. Corporate tax reform, in how it impacts the Housing Credit, is politically and mathematically difficult. However, the Housing Credit is one part of the tax code that has bipartisan support. One can look for an example at the Cantwell–Hatch Affordable Housing Credit Improvement Act of 2016 that gradually expands the credit by 50%, allows for a fixed applicable multiplier for bond financed projects, and makes technical tweaks to enhance the efficiency of the Housing Credit.
After 30 years of success, the Housing Credit has done exactly what Congress intended it to do: transfer risk from taxpayers to private capital markets and create and preserve affordable housing.
Now, it is time for the Housing Credit and tax code to renew their policy vows. Corporate tax reform should not be feared by affordable housing advocates. With tax reform, the Ways and Means and Senate finance committees, as well as the Trump Administration with support from the affordable housing industry, can lower tax rates, create jobs, increase GDP and expand the Housing Credit. We must embrace tax reform and this extraordinary moment to strengthen the Housing Credit. Now is the time.
Jeffrey Whiting is President and CEO of CREA, LLC and the President Emeritus of the Affordable Housing Tax Credit Coalition.