CBO’s Distribution Estimates Ignore Expenditures’ Benefits to Low-Income Families and Distressed Communities

Published by Michael Novogradac on Tuesday, June 4, 2013 - 12:00am

The Congressional Budget Office (CBO) last week released a report, “The Distribution of Major Tax Expenditures in the Individual Income Tax System,” that examines how 10 of the largest tax expenditures in the individual income tax system in 2013 are distributed among households with different amounts of income. The report gained some attention because the 10 tax expenditures it considers are distributed unevenly across the income scale. But the real distributional impact of tax expenditures is not as simple as the report might suggest.

Noticeably absent from the report are the low-income housing tax credit and new markets tax credit, both of which benefit low-income households. Over time the LIHTC community has increased the program’s efficiency by seeking large dollar investments from large corporations. And when the NMTC was created, it was modeled on the same successful approach. But the LIHTC and NMTC are purchased tax benefits and substantially all of the net economic benefit of the LIHTC and NMTC goes to low-income families and distressed communities.

As I noted in an April 16 post, a Government Accountability Office (GAO) report, “Corporate Tax Expenditures: Information on Estimated Revenue Losses and Related Federal Spending Programs,” recently noted the importance of considering who ultimately benefits from a tax expenditure: “For example, the credit for low-income housing investments, while claimed largely by corporate taxpayers, is intended to ultimately benefit individuals by stimulating the production of affordable rental housing and thereby enabling low-income households to obtain potentially higher quality housing for lower rent than they would have otherwise.”

Low-income renters are the primary beneficiary of the LIHTC. And in fact, the program has succeeded in serving tenants at incomes significantly lower than the federal requirement. While income limits for the LIHTC program are set at 50 or 60 percent of area median income (AMI), in “What Can We Learn about the Low Income Housing Tax Credit Program by Looking at the Tenants?” the Furman Center for Real Estate and Urban Policy, New York University found that approximately 60 percent of LIHTC property residents have incomes at or below 40 percent of AMI. According to the report, only 20 percent have incomes at or above 50 percent of AMI. This is clear evidence that low-income populations directly benefit from the LIHTC.

Similarly, distressed communities are the primary beneficiary of the NMTC. Of the more than $5 billion in loans and investments in low-income communities made in 2012, 70 percent were in severely distressed communities. Severely distressed communities are areas that have significantly higher poverty rates and lower median family incomes than those required under the NMTC program; areas that have unemployment rates at least 1.5 times the national average; and/or areas that have been designated for economic development through other programs, such as brownfields, empowerment zones and renewal communities. In other words, the NMTC is benefiting the communities in most need of investment and those communities that otherwise may not be considered for development.