LIHTC and NMTC Play Key Roles in Tax War on Poverty

Published by Michael Novogradac on Friday, April 18, 2014 - 12:00am

Fifty years ago, President Lyndon Baines Johnson enacted a series of policies that became known as the War on Poverty. Since then, the government has added a variety of policies to combat poverty, including tax provisions such as the Low-Income Housing Tax Credit (LIHTC) program and the New Markets Tax Credit (NMTC) program. A recent paper by Yale Tax Law Professor Susannah Tahk introduces the concept of the “tax war on poverty” and analyzes the growing number of tax code provisions to which the concept refers. Tahk says tax lawyers must embrace the extent to which tax law has become the new poverty law and to use these tax tools to fight the nation’s continuing war on poverty. On that we agree.

Unfortunately, much of the information in the paper about the LIHTC and NMTC provides a poor overview of these two programs, the contributions that they make to help low-income families and communities and their histories of success.

Her discussion of LIHTC begins by stating “The federal government spent $5.8 billion on the LIHTC in 2012 roughly the same amount expended on all federal public housing in the U.S. in that year.”

In order to provide a better comparison, one should note that the LIHTC provides a subsidy for developers who commit to lease housing at restricted rents to low-income families for 30 years or more. Tahk’s paper says the low-income restrictions are generally 15 years, which is simply incorrect. As confirmed by the U.S. Department of Housing and Urban Development (HUD) in its report “What Happens to Low Income Housing Tax Credit Properties at Year 15 and Beyond?” most LIHTC properties maintain low-income restrictions for 30 years or more.

Tahk provides an annual cost of $5.8 billion and an annual LIHTC production estimate of between 69,000 and 100,000 affordable rental units. The problem with this sort of analysis is that it doesn’t take into account that LIHTC units must remain affordable for 30 years. If we assume the LIHTC program produced 100,000 rental units in 2012 and that the total amount of credits available that year — $711,082,039 — was allocated, and taking into account that every year for 10 years the same amount of credit is accrued, the cost per year of a unit constructed is $4,740 over 15 years. Over 30 years, the cost drops to $2,370. By comparison, in 2012, there were approximately 1.12 million public housing units, subsidized by approximately $5.8 billion dollars, resulting in a per unit cost of approximately $5,200 per unit. This simple comparison illustrates that the LIHTC is subsidizing considerably more housing units at a lower per unit cost. However, the two programs serve different average tenant incomes, provide differing levels of social services and have numerous other differences. As such simple comparisons aren’t very meaningful. But it is clear that both are aiding the delivery of affordable rental housing to low-income families.

Tahk also states that while the LIHTC has generated between 69,000 and 100,000 units annually, there may be a high level of substitution–the LIHTC units crowd out the units that would have been built otherwise. A paper published by John Hopkins University and the University of Technology Sydney found that, even after accounting for potential crowd out variables, the LIHTC significantly increased the overall supply of housing. Furthermore, even if substitution occurs, the substitution effect replaces market rate housing with rent restricted, low-income housing. This means that even if the total supply of housing does not increase, the increase in rent restricted affordable housing does, which is a good policy outcome.

Regarding civil rights protections, Tahk states that the LIHTC program is not subject to the same rules as other housing programs. While it is true that is it not statutorily bound in the same way other programs are, HUD, the Treasury Department, and the Justice Department signed on to a memorandum of understanding in 2000 that made LIHTC properties subject to Fair Housing Law civil rights protections. Much of the debate Tahk references centers around whether the federal government should use housing policy to affirmatively further integration. Many in the civil rights community believe housing policy that focuses on preservation and rehabilitation traps minorities into poverty-ridden areas. There are two reasons this criticism does not apply very well to the LIHTC. First, preservation and rehabilitation is less expensive than new construction, so keeping the option to preserve and rehabilitate housing allows for the existence of more affordable housing units overall. Second, the LIHTC actually does fairly well on the measure of moving people out of low-income neighborhoods. In “The Low-Income Housing Tax Credit Program Goes Mainstream and Moves to the Suburbs,” Kirk McClure writes, “By entering the suburbs, the LIHTC program is meeting and even exceeding the performance of the Housing Choice Voucher Program in terms of offering opportunities to live in low-poverty settings.”

Tahk also cites research stating that the LIHTC does not serve the poorest individuals. She states that “because the LIHTC creates an incentive to build housing for individuals at the upper end of the income levels, the deeply poor are less likely to live in housing built with that credit.” There are two basic issues with this criticism. One, the LIHTC actually does serve a very disadvantaged population. Many state housing agencies include provisions in their qualified allocation plans to prioritize developments that serve those very populations. Those who make 40 percent of area median income (AMI) are considered by HUD to be in the “very low-income” category, and research conducted by the Furman Center for Real Estate and Urban Policy indicates that “62 percent of [LIHTC] tenants have incomes at or below 40 percent of AMI.” Two, serving the very poorest is not the only goal of the LIHTC program. The LIHTC was purposefully created to help a wide swath of poor families, as affordable housing remains out of reach for more than just the poorest Americans. According to the Joint Center for Housing Studies at Harvard University, 50 percent of Americans that rent pay more than 30 percent of their income for rent, which is the standard measure for rental affordability.

Tahk then cites the work of Megan Ballard, arguing that the statutory language of the LIHTC program advantages for-profit builders over nonprofit builders. A close reading of the actual paper she cites, however, reveals that Ballard doesn’t make that argument. Ballard’s argument is that the political influence of for-profit developers allows them to strip the statute of special protections held by nonprofits. Regardless of the specific merit of these protections, it is inaccurate to portray their removal as somehow advantaging for-profit builders over nonprofits; rather, at best, they are creating a more even playing field.

On the NMTC, Tahk gets some basic facts wrong.

She states that the NMTC equals “generally between [3] and [6] percent per year over a number of years) of a “qualified equity investment” in the CDE.” This is simply untrue; qualified equity investments are 5 percent or 6 percent a year for seven years.

She states that to qualify as an investment in a low-income community, the investment must have a “certain level of its activities in a “low-income community,” as defined by reference to income levels in census tracts.” This ignores several things. First, in addition to an average 80 percent median family income level test, a census tract can qualify as a low-income community if it has a poverty rate of at least 20 percent. Second, an applicant is more likely to succeed if they apply in severely distressed areas, which must have a poverty rate greater than 30 percent, median family income of 60 percent or less of that area’s median family income, or unemployment rate at least 1.5 times the national average.

She states, “the federal government allocated $3.5 billion to the new markets tax credit

in 2013.” This fails to clearly state how the program works, and as a consequence what the cost is to the federal government. The $3.5 billion represents the total amount of NMTC qualifying equity investments that community development entities can receive. Tax credits are 39 percent of total NMTC qualifying equity. These tax credits in turn are claimed over seven years. The government’s cost is reflected in the cost of tax credits, not equity.

Tahk cites arguments that state that the NMTC does not help the poor, but rather causes gentrification and that the credit primarily benefits investors, not residents. She cites Jennifer Forbes, who argues that the credit “primarily benefits private investors.” The problem is that a closer reading of Forbes’ paper reveals that she does not actually provide evidence to back this assertion, and instead relies on theoretical reasons why a place based credit may not be as effective as a hypothetical alternative. This contrasts pretty strongly with the real, actualized benefits of the NMTC to the poor. Between 2003 and 2007, the NMTC has, according to the Urban Institute, “…created or retained 135,970 permanent jobs and 151,304 construction jobs … Eighty percent of projects … contributed to some form of increased city or county tax revenues… there appears to have been positive change in almost [seven] of every 10 cases.”

All NMTC investments are statutorily required to be in areas that either have poverty rates that are at least 20 percent or median incomes that are at or below 80 percent of the area median income. In 2012, 70 percent of NMTC investments exceeded these minimum distress criteria and were made in severely distressed areas. While Tahk argues, “even the working extremely poor probably cannot afford to shop much at any businesses receiving the new markets tax credit, although some of those businesses may provide jobs to those in deep poverty who are working,” this does not reflect both the location of NMTC businesses (which are in deeply poor areas) and the actual make up of many NMTC businesses. NMTC businesses are incredibly useful to their communities; they include charter schools, fresh food grocery stores in food deserts, community health centers and community recreation centers.

This inaccurate view stems from the fact that Tahk thinks the NMTC is primarily commercial real estate driven. While this is somewhat true, that does not mean it’s a bad thing. NMTC projects tend to be real estate focused because of strict requirements to keep investment within the low-income community being served. Real estate, by definition, is difficult to move outside of a community. Furthermore, there are many, many kinds of NMTC businesses. They can include shopping centers, youth clubs, community centers, charter schools, food processing plants, lumber mills and neighborhood centers.

Finally, Tahk discusses the racial implications of the NMTC. She cites Janet Thompson Jackson who maintains that the NMTC’s benefits flow primarily to “white investors” and that it “disrupt[s] the tradition of African-Americans investing in their own communities.” There are a few issues with this argument. First, Jackson’s paper provides no empirical evidence to support that the investment community for the NMTC is any more or less racially distributed than the broader investor community. Second, there is no evidence presented to indicate the NMTC disrupts black investment; if anything, it brings capital into deeply capital starved communities. Third, the argument ignores that the primary beneficiaries of the NMTC are not investors but the businesses and communities they invest in. On this front, the program has had a remarkably progressive record. The program supports hundreds of minority owned businesses. In 2012, almost 10 percent of NMTC awardees were minority-owned or controlled entities, earning allocations totaling $285 million.

Overall, Tahk’s analysis on such an important and critical issue is welcome, there are some issues in her presentation of the LIHTC and the NMTC that could mislead a reader unfamiliar with the subject matter.