How Planned Tax Cuts Could Deepen Affordable Housing Crisis
Written By Ricardo Álvarez-Díaz
ABOUT THE AUTHOR | Ricardo Álvarez-Díaz is the founder and principal of the architectural firm Álvarez-Díaz & Villalón, with offices in Miami and San Juan, Puerto Rico.
President Trump’s election has affordable housing developers on pins and needles and numerous U.S. cities and housing advocates predicting disaster.
The newly elected president’s pledge to cut the corporate tax rate from 35 percent to 15 percent has prompted large banks and other investors to back away from tax credits that reduce their tax burden in exchange for investing in low-income housing projects.
Investors believe that lower corporate taxes would reduce the value of these tax credits. And they may be right. Since Trump took office, their value reportedly has dropped between 10 and 15 percent, leaving affordable housing developers scrambling for funding.
The federal Low-Income Housing Tax Credit (LIHTC) program funds about 90 percent of affordable housing projects in the U.S. The program gives state and local LIHTC-allocating agencies nearly $8 billion a year for the acquisition, rehabilitation and new construction of low-income housing.
Woe to HUD Under the New Budget
In March, the Trump administration released a partial outline of its 2018 budget, proposing billions of dollars in funding cuts for most government agencies, including the U.S. Department of Housing and Urban Development (HUD).
If Trump's budget passes, HUD is slated to lose about $6.2 billion next year, a 13.2 percent drop from 2016. The cuts are expected to aggravate an already desperate affordable housing crisis in the U.S.
HUD provides housing assistance to approximately 5 million Americans through rental vouchers, subsidies for landlords, public housing projects, and community grants.
Housing advocates claim the proposed budget cuts would force people out of their homes, negatively affect grant programs, and increase rental prices as low-income housing units decline, making housing even less affordable.
Impact of HUD Budget Cuts On Puerto Rico
Affordable Housing Online, a database of available federal housing assistance in each state, estimates Puerto Rico would lose more than $115 million a year under Trump’s 2018 budget. The HUD budget cuts would affect some 1,560 households on the island, the online service recently reported.
Following is a breakdown of expected HUD loses in Puerto Rico:
Community Development Block Grant: $55,388,983
HOME investment partnerships: $16,294,628
Public Housing Operating Fund: $34,313,933
Housing Choice Voucher: $9,160,049
Source: Affordable Housing Online figures based on the proposed 2018 budget, HUD Resident Characteristics Report data, HUD HA Profiles data, HUD Exchange Funding data, HUD Voucher Management System data and other HUD data sources.
Shrinking LIHTC Values
The Low-Income Housing Tax Credit has financed nearly 3 million homes in the U.S. and leveraged more than $100 million in private investment since its creation 30 years ago by President Reagan's 1986 Tax Reform Act.
The LIHTC program distributes federal income tax credits to affordable housing developers through state housing agencies. Developers sell the tax credits to investors to get funding for their projects. For each dollar invested on tax credits, investors save one dollar in taxes.
When tax rates drop, demand for tax-saving investments also drop. Since the election, the value of tax credits has dropped by 10 to 15 percent. As a result, developers are getting less than a dollar for each dollar's worth in tax credits they trade.
Developers on the Edge
President Trump's promise to lower the corporate tax rate would reduce companies' tax burden and with it their need for tax credits to lower their tax bills. Because the LIHTC is the largest source for funding for low-income housing in many states, affordable housing developers are seeing red in budget gaps and future funding.
Investors already are shunning the low-income housing tax credit market, and those staying are paying less for the credits, according to industry experts and news reports.
Developers suddenly find themselves in a pickle, having to seek funding elsewhere, slash the number of units or suspend projects.
The uncertainty surrounding tax reform and budgets are slowing new development of affordable housing and stalling projects that were underway throughout the country, not only cutting into the number of available units but also raising the rents of others.
Meanwhile, affordable housing advocates and developers have their eyes on The Affordable Housing Credit Improvement Act of 2016, a bill introduced by Washington Senator Maria Cantwell (D-WA) that would strengthen and expand the LIHTC program by 50 percent over five years. The increase would create at least 400,000 additional affordable units over the next decade.
State of Affordable Housing: A Call for Help
A report issued last year by the National Low Income Housing Coalition warns the U.S. faces a nationwide shortage of 7.4 million affordable rental homes available to extremely low-income citizens, up 60 percent from 2000, when the gap was 4.6 million, according to Cantwell's bill.
“There is no state in the U.S. where a minimum-wage worker working full time can afford a one-bedroom apartment at the fair market rent,” Cantwell notes.
More than 7 million Americans lost their homes to foreclosure as a result of the 2008 economic crisis; consequently, home ownership rates have fallen from a high of 69.2 percent in the second quarter of 2004 to 63.4 percent in the second quarter of 2015, the lowest level since 1967, according to the bill. By mid-2015, some 43 million families and individuals were renters, up 9 million from 2005 and the largest gain in the number of renters during any 10-year period on record.
Despite growing demand for rental housing, the U.S. lost nearly 13 percent of its existing affordable rental housing stock between 2001 and 2013 and added only 2.2 million new units between 2005 and 2014, the lowest 10-year production rate on record since 1974, according to the bill.
Constrained supply and high demand for affordable housing have pushed rents up across the U.S. at an average rate of 3.5 percent, the highest in 30 years. With competition in the rental market at an all-time high and flat or lower incomes, affordable housing development has been unable to keep pace, leading to exploding unaffordability, Cantwell explains.
In addition to Cantwell’s efforts, numerous businesses and organizations in the affordable housing industry are calling on Congress to address the nation's severe shortage of affordable rental housing.
A Call to Invest in Our Neighborhoods (ACTION) has organized a campaign representing more than 2,000 national, state, and local affordable housing stakeholders supporting the bill and urging Congress to expand and strengthen the LIHTC program.
ACTION describes the LIHTC program as "our nation’s most successful tool for encouraging private investment in the production and preservation of affordable rental housing, responsible for nearly all of the affordable housing built and preserved in recent decades. It is a model public-private partnership, bringing to bear private sector resources, market forces and state-level administration."
The bottom line: These are uncertain times for the affordable housing market. While the future of tax reform, the HUD's budget and the LIHTC program hangs in the air, developers will have to keep their ears to the ground to ease their reliance on tax credits and find funding for their projects elsewhere.