Tax Credits Help Promote Equity in Affordable Housing, Community Development

Published by Amy Hook, Peter Lawrence on Wednesday, June 8, 2022 - 12:00am

Significant inequities exist in accessing financing for affordable housing and community development investments. These inequities leave many low-income and Black, Indigenous and people of color (BIPOC) households at a disadvantage. One way to address inequities could be through tax policy though, as reported in a recent study from the Government Accountability Office, there is a need for additional data linking taxpayer and demographic data to determine the effects of tax policy on households by characteristics such as race, ethnicity and sex.   

However, community development tax credits are important tools in helping to overcome inequities in accessing financing. Certain tax credits can provide financial incentives to build affordable rental housing, necessary goods and services to historically underserved communities and populations, and flexible, low-cost private capital for small businesses in low-income communities. Tax incentives such as the low-income housing tax credit (LIHTC), the new markets tax credit (NMTC) and the opportunity zones (OZ) incentive can be used to foster equity through investing in low-income communities and households.

Low-income communities were hit hardest by the COVID-19 pandemic, saw slower rates of recovery and are now being negatively impacted by increasing inflation rates. Because these communities were already underserved and facing difficulties pre-pandemic, they require a greater level of investment to attain true equity. Tax incentives can be the tool to help these communities recover. And, investing in underserved communities will work to promote equity in these communities.

House Ways and Means Committee Hearing

On April 6, the House Ways and Means Committee held a hearing titled, “Overcoming Racism to Advance Economic Opportunity” to discuss how racism is perpetuating economic inequalities for people of color. Some of the topics discussed were economic opportunities, health inequities, and housing. One of the witnesses, Camille Busette from the Brookings Institution, gave a series of examples of racial inequities. She said that White households hold more than 10 times the wealth of Black households as of 2022 and that households of color are more likely to live in historically redlined areas that have higher levels of pollutants. She also stated that Black and Latino households have higher death rates from COVID-19 compared to White households. These inequities demonstrate the need for policies that target their causes. LIHTCs finance affordable and healthy rental housing, and state policies in qualified allocation plans help direct the siting of newly constructed housing in communities without environmental hazards. NMTCs also finance federally qualified health care facilities in underserved low-income communities.

OZs were also briefly discussed at the hearing. In response to witness testimony Rep. Ron Estes, R-Kansas, noted that the original legislation for OZs was a bipartisan bill whose main purpose was to provide access to capital for marginalized communities, as a lack of access has been one of the main barriers to economic opportunity.

On April 7, the Opportunity Zones Transparency, Extension and Improvement Act (H.R. 7467; S. 4065) was introduced in Congress and it would, among other things, establish reporting requirements that would help to give necessary information on the community benefits of OZs. This legislation is detailed in a previous Notes from Novogradac post. If passed into law, these reporting requirements will show which communities are being impacted by the OZ incentive, and how decisions made by investors and qualified opportunity funds (QOFs) are affecting targeted communities and their residents. The requirements would show if the underserved communities initially targeted for assistance by the incentive are, in fact, receiving investment. As of the first quarter of 2022, more than $28 billion in equity raised by QOFs tracked by Novogradac, with the total OZ equity raised being much higher than the amount reported by Novogradac. Understanding the demographics of those impacted, the number of jobs created, the types of existing businesses receiving investment and the number of affordable homes created by the billions of dollars in investments that result from this incentive—all statistics those pushing for increased reporting requirements are asking for—is a first step in evaluating the program’s impact on equity.   

LIHTC Funds Affordable Housing for Low-Income Households

Though the LIHTC was not discussed during this recent congressional hearing, it is an essential financing tool for affordable housing which helps to promote equity. Since its inception, the LIHTC has financed the construction or preservation of more than 3.6 million affordable rental homes, according to the National Council of State Housing Agencies. Its minimum 30-year affordability requirements provide long-term affordable housing for low-income households. Recent Novogradac analysis shows that LIHTC properties have not been concentrating low-income households in economically or racially segregated areas. The analysis shows that there is more diversity in LIHTC development siting, especially among newly constructed properties. This analysis is detailed in a previous Notes from Novogradac post.

The LIHTC can also help to combat racial health disparities. In her written testimony submitted for the April 6 hearing, Busette discussed these disparities and outside of the death rates for COVID-19, she also noted that people of color have higher death rates for treatable conditions, have higher rates of pregnancy complications, and have higher risks of chronic health conditions. The LIHTC can work to mitigate these health disparities by providing additional affordable housing, as well as housing in areas with better access to healthcare, thus removing one barrier to access.

The LIHTC helps to provide safe, affordable housing for low-income households, and low-income households and communities are at a higher risk from climate change in varied ways. As climate change poses a greater threat to housing stability and affordability, low-income households will need more access to affordable housing in areas that will not be as affected by climate change.

Renewable Energy Tax Incentives Help Mitigate Climate Change, Especially for Vulnerable Communities

Renewable energy tax credits, such as the investment tax credit (ITC) and production tax credit (PTC), will help to mitigate the effects of climate change by providing financing for clean energy projects. The United States has now passed 200 gigawatts in total clean energy capacity and this can power 2 out of 5 households in the country. Though these statistics are promising, more needs to be done to build more clean energy capacity and help the country reach the Biden Administration’s 2035 goal of 100% carbon pollution-free electricity in the United States. Though it is stalled in the Senate due to lack of support from Sen. Joe Manchin, D-West Virginia, the November version of the Build Back Better Act (BBBA) included provisions that would provide an additional 20% credit for the ITC if a solar facility was placed in service in connection with a qualifying low-income residential building or low-income benefit project. Financing clean energy projects works to increase equity by increasing the number of available energy resources and reducing pollution, which helps to mitigate climate change. Mitigating the impacts of climate change can help to protect existing homes, including affordable homes, in areas that are or will be most affected by climate change. Protecting these homes will increase equity by allowing households, including low-income households, to remain in their homes and it will prevent the affordable housing crisis from getting worse.

NHTC Could Provide Affordable Owner-Occupied Homes and Work to Close Racial Homeownership Gap

Though it has not been enacted, the neighborhood homes tax credit (NHTC) could be a tool to advance racial equity by promoting homeownership to low-income households. As of 2021, the White household homeownership rate is 72% while the Black household homeownership rate is only 42%. The NHTC would work to close this gap by helping to finance the construction of affordable owner-occupied homes in eligible census tracts in rural, urban and suburban areas. Closing this gap would work to promote equity.

The NMTC Provides Needed Investments into Businesses in Underserved Communities

According to the CDFI Fund, more than $66 billion in allocation authority has been awarded through the NMTC, which has been used to finance more than 9,500 businesses and create or retain nearly 871,000 jobs since 2003. NMTC program awards have generated $8 of private investment for every $1 of federal funding. NMTC allocations  can be used for many different types of projects that work to meet the needs of the low-income communities and businesses in both urban and rural areas that have confronted economic challenges over many decades. Some of the projects it has helped finance include housing, healthcare, schools, grocery stores, manufacturing, retail businesses and nonprofit services.

At the time of this writing, the NMTC is set to expire Dec. 31, 2025 if it is not renewed or made permanent. The NMTC must be made permanent to ensure investments continue to flow into low-income communities. Making the NMTC permanent would promote equity by giving investors a financing tool for their investments into the many diverse needs of low-income communities.

Enhancing the Historic Tax Credit (HTC) Could Mean more Properties Developed in Low- and Moderate-Income (LMI) Census Tracts and Economically Distressed Communities

Fiscal year (FY) 2021 saw an historic level of HTC certifications of completed work and preliminary certifications of rehabilitation, as reported by the National Park Service (NPS).  While HTCs are not directly used to create and rehabilitate housing, HTC developments can include housing, and the HTC can be used in conjunction with the LIHTC. The NPS found that through FY 2021, 2,161 certifications were issued and completed HTC developments were responsible for rehabilitating and creating 16,245 homes. Of this total, 44% (7,220) are low- and moderate-income homes, many of which are also financed by LIHTCs.  As noted above, the LIHTC is the primary mechanism through which the creation and rehabilitation of affordable rental homes are financed, and the ability to use this credit in HTC developments means funding is reaching those households that are traditionally underserved. NPS’s “Annual Report on the Economic Impact of the Federal Historic Tax Credits for Fiscal Year 2020,” which details the impacts of the HTC in FY 2020, found that since the credit’s inception, 51% of HTC properties are in LMI census tracts and 75% are in economically distressed communities.

Next Steps

One of the best ways to continue the positive impacts of these tax credits and create further equity is to expand them or make them permanent, if applicable.

  • Enacting the Opportunity Zones Transparency, Extension and Improvement Act would provide more information about the social impacts of OZs, thus creating better understanding of its equity impacts and extend the OZ incentive by two years, allowing for more investment into underserved communities.
  • Expanding the LIHTC would provide financing to construct or preserve more affordable rental homes.
  • Expanding and making permanent the ITC and PTC will encourage investments into clean energy to reduce pollution and increase available energy resources, which will benefit low-income communities.
  • If enacted, the NHTC could be a tool to advance racial equity by promoting homeownership to low-income households.
  • If the NMTC were to be made permanent, it can indefinitely provide investments into businesses in low-income communities, thus working to promote equity. The permanency could lead more NMTC investors to invest in operational systems to track community impacts over time.
  • Enacting the Historic Tax Credit Growth (HTC-GO) Act of 2021 (H.R. 2294/S. 2266) would enhance the incentive and respond to the difficulties of project development during a pandemic. Proposed changes in HTC-GO would enhance the use of the HTC, making it easier for nonprofits and other tax-exempt entities to access the incentive, while also facilitating use of the HTC in conjunction with other tax credits.   

BBBA had included expansions to the housing and clean energy tax credits and an earlier version included NMTC permanence and HTC expansion. Negotiations on BBBA appear to have restarted, and the bill’s expansion of the tax credits shows federal support for tools that have the ability to increase equity. Whatever form the next iteration of the reconciliation bill takes, equity will only be achieved by a variety of policies, including those that promote investing in low-income BIPOC communities, such as affordable housing and small businesses, and community development tax credits are one of the main drivers of these investments.