Washington Wire: Setting Straight the LIHTC’s Stellar Record

Published by Michael Novogradac on Saturday, June 1, 2013
Journal thumb June 2013

Last month, Senate Finance Committee Chairman Max Baucus, D-Mont., and House Ways and Means Committee Chairman Dave Camp, R-Mich., teamed up to launch TaxReform.gov, a website dedicated to obtaining input on tax reform. Developed in partnership with the Joint Committee on Taxation, TaxReform.gov will serve as a platform for the public to weigh in on tax reform. Input from visitors to the web site will be valuable to the Senate Finance Committee and House Ways and Means Committee as they craft legislation.

This is one more significant step toward tax reform. And based on some of the criticism and inaccurate information presented during the April 25 Ways and Means Committee hearing on tax reform and residential real estate, it will be more important than ever for the affordable housing community to provide support and education about the low-income housing tax credit (LIHTC) through this platform and others.

Housing Advisory Group Chairman Bob Moss was invited by the committee to discuss the LIHTC at the hearing. He spoke about the efficiency and flexibility of the LIHTC program, the quantity and quality of affordable housing that it has produced since its enactment, and the major economic benefits of the LIHTC. Robert Dietz, assistant vice president for tax and policy issues for the National Association of Home Builders and Thomas Moran appearing on behalf of the National Multi Housing Council and the National Apartment Association also spoke in support of the LIHTC.

Often Wrong, But Never in Doubt
In addition to this positive representation, however, three witnesses at the April 25 hearing questioned the efficiency and benefit of the LIHTC.

The Cato Institute’s Mark Calabria suggested that most of the LIHTC subsidy ends up with developers, syndicators and lawyers, who he argued shouldn’t be a priority for subsidy. These parties do indeed provide direct and indirect services to entities that build, renovate and operate affordable rental housing, but to suggest that most of the subsidy benefits this group is a gross mischaracterization. These entities provide services that make the LIHTC the efficient program that it is. As a result of their efforts, and the underlying design of the LIHTC, the federal government pays only for long-term, compliant affordable rental housing that would not otherwise be developed. More information about the remarkable track record of LIHTC-financed properties, particularly when compared to the performance of other federal government subsidies for affordable rental housing, can be found in the Novogradac special report “Low Income Housing Tax Credit: Assessment of Program Performance & Comparison to Other Federal Affordable Rental Housing Subsidies.”

Low-income tenants continue to be 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.

At the hearing, Phillip Swagel, a professor of international economic policy at the University of Maryland School of Public Policy, said the extent to which the LIHTC is effective should be assessed. Specifically, he suggested analysis was needed to determine the extent to which the LIHTC contributes to greater availability of affordable housing and thus lower rents than would be the case without the tax credit.

A number of studies, including the aforementioned Furman Center study, have analyzed the effect of the LIHTC on the supply of affordable housing. For example, the Joint Center for Housing Studies of Harvard University reports in “The State of the Nation’s Housing 2012,” that at present, the “only significant growth in subsidized rental housing comes through the LIHTC program, which continues to add about 100,000 affordable units each year.” The same report notes that “ … most new construction adds units at the upper end of the market, with the median monthly asking rent for newly completed apartments exceeding $1,000 each year in 2006–11. The median would be even higher if not for the substantial share of multifamily construction assisted by the federal Low Income Housing Tax Credit program in recent years.”

When asked, Jane Gravelle, a senior specialist in economic policy with the Congressional Research Service, suggested that it might be better to provide affordable housing for low-income families through direct spending and not through the tax code. However, as Moss noted during the hearing, both supply-side and demand-side policies are needed to contend with the lack of affordable rental housing in the United States. Not only because affordable housing would not be built or preserved without the LIHTC, but also because of the intense pressure on government spending that has increased consistently in recent years.

The Joint Center for Housing Studies warns, “If calls for significant cuts to domestic spending (including the voucher program) or to financial support provided through the tax code (including LIHTC) are successful, the nation would move even further away from its longstanding goal of ensuring decent, affordable housing for all Americans.”

Chairman Camp asked if the shortage of affordable housing was a problem throughout the nation, or if it was specific to certain areas. The Center for Housing Policy reports in “Housing Landscape 2013” that in 2011, nearly one in four working households (renters and owners combined) had a severe housing cost burden. Moreover, the center says the share of working households with a severe housing cost burden increased almost two percentage points between 2008 and 2011, rising from 21.8 percent to 23.7 percent. In addition, according to the American Community Survey, while the number of renters earning $15,000 or less grew by 2.2 million between 2001 and 2010, the number of rental units that were both adequate and affordable to these households, declined by 470,000. As a result, the gap between the supply and demand for these units widened and is estimated to be approximately 5.1 million units.

Even though every state has a need for more affordable rental housing, those needs vary. One of the key features of the LIHTC is that each state determines its needs and allocates credits accordingly. States impose their own priorities such as giving preference to developments that leverage other federal subsidies, serve particular populations such as the elderly, veterans or disabled; are built near mass transit; or provide the lowest rents. This flexibility is unique to the LIHTC in the context of federal rental housing programs.

While Rep. Eric Paulsen, R-Minn., also spoke favorably about the LIHTC, he asked about the witnesses’ thoughts on permanency for the LIHTC. Responding to Rep. Paulsen’s question, Swagel said he thought “permanence would be very important.” As many readers likely know, Congress agreed, which is why they made the LIHTC permanent 20 years ago in the Omnibus Reconciliation Act of 1993. It’s quite telling that the witnesses who were critical of the LIHTC don’t know enough about the program to know that it has been a permanent part of the tax code for two decades.

To Know the LIHTC is to Support It
It was encouraging to see that those lawmakers who are familiar with the LIHTC were supportive of the program.

The most enthusiastic support during the hearing was voiced by Select Revenue Measures Subcommittee Chairman Pat Tiberi, R-Ohio, who noted the benefits of including the private sector via public-private affordable housing partnerships, saying the LIHTC program “gets the best of both worlds.” He also asserted that of HUD, Section 8 and LIHTC properties, that the LIHTC property is the best managed, best utilized and best housing for low-income populations.

Ranking Member Sandy Levin, D-Mich., noted in his remarks that the LIHTC is not a loophole, but is a policy enacted on a bipartisan basis. He suggested that Congress should be careful about making significant changes in it.

Fortunately, despite the skepticism expressed in the April 25 hearing, there is a wealth of evidence to illustrate the important benefits the LIHTC provides for low-income Americans.

To increase this familiarity with and, by extension, support for the LIHTC, the affordable housing community must reach out to lawmakers to help them understand this important program. This can be done by participating in the advocacy and education efforts of the Affordable Rental Housing A.C.T.I.O.N. (A Call To Invest in Our Neighborhoods) campaign, inviting your senators and representatives to tour your successful LIHTC properties, or simply writing a letter describing the benefits that the LIHTC provides in their districts.