The Harm to Affordable Housing

AP Photo/Jeff Roberson

New housing receiving federal low-income housing tax credits in St. Louis

This article appears in the Summer 2018 issue of The American Prospect magazine. Subscribe here

A construction fence surrounds the decaying Church of the Redeemer in Flatbush, one of Brooklyn’s many gentrifying neighborhoods. The congregation has provided the land to the nonprofit Mutual Housing Association of New York to create an oasis of 75 affordable apartments. Rents will start at $935 a month, and will be guaranteed affordable for 30 years. The church, meanwhile, will build itself a new home, tapping $5 million from selling construction rights to the housing group.

The key subsidy making this deal possible is the Low-Income Housing Tax Credit, a better-than-nothing gimmick that helps the poor by rewarding the rich. Over the past three decades, LIHTC—pronounced lie-tek to people in the business—has helped finance more than two million affordable apartments, or about double the number of remaining traditional public housing units produced in its heyday from the 1930s to the 1970s. In this case, Bank of America will supply most of the $20 million to finance construction of the Flatbush apartments, because the law allows the bank to use this credit to reduce its corporate taxes by one dollar for every dollar it provides to a developer of low-income housing.

But thanks to the 2017 Republican Tax Act, the housing credit is suddenly worth a lot less. Why? Because the Tax Act dropped the corporate rate from 35 percent to 21 percent.

The credit dates to a Reagan-era tax provision, a variant of trickle-down economics that has grown into a $9 billion-a-year subsidy underwriting a vast industry of financial companies in symbiosis with for-profit middlemen and community-based nonprofits. The LIHTC makes for an inefficient and inequitable substitute for a robust public housing program. But the credit is what there is, and the effect of the Tax Act will be to reduce its value, and the provision of affordable housing.

In Flatbush, Mutual Housing’s investors dropped their commitment by more than half a million dollars from a bid that was already depressed in anticipation of the tax cut, blowing a hole in a budget already stretched to the limit. “You have underwritten these deals so tightly you are literally going line by line through the project to find the money,” says Ismene Speliotis, executive director of the Mutual Housing Association of New York. “It’s that painful, that micro.”

Speliotis has been harvesting the housing tax credits since 1994, and her group’s history speaks to the unusual partnership between capitalists and grassroots organizers spawned by the credit. Formerly, it was called the ACORN Housing Company, an adjunct to the poor people’s community organizing group that was demolished when political saboteur James O’Keefe entered with a video camera and pimp costume. Both ACORN and the housing affiliate reorganized and rebranded.

“The tax credit program is pretty much the only affordable housing production program that exists,” notes Hal Keller, president of the Ohio Capital Corporation for Housing, which helps nonprofit developers access funding through the program and pulled together $217 million from bank investors into a LIHTC pool last summer. “The tax credits are what we rely on to create housing for people with disabilities, senior housing, and supportive housing, and also to rehab existing housing.”

In rural Ohio, the credits capitalize the replacement of dilapidated homes with decent ones. In Columbus, they financed Scholar House, a residence for single-parent college students. Keller says the value of the credits has declined as much as 15 percent in Ohio. Other federal programs can help fill the gap, as can a modest state housing trust fund, but then those funds won’t be available for other developments, resulting in fewer apartments. And of course direct federal programs that help the poor are also under assault from the Trump administration.

Industry analyst Novogradac & Company has projected that the 21 percent corporate rate would reduce the supply of affordable housing by 235,000 units nationally over the coming decade. “How do you make that up?” Speliotis asks. One way is by relying more on state and local governments. The administration of New York Mayor Bill de Blasio has made a multibillion-dollar commitment to affordable housing and agreed to increase subsidies for Flatbush, which already included federal Section 8 rent vouchers for seniors and subsidies to help the homeless transition out of shelter. City officials predict that as a result of the new corporate tax cut, they’ll have to spend $200 million more a year on subsidies than planned. That leaves the city with less overall buying power for building or preserving affordable housing.

Another strategy is to stretch the value of the subsidy by marketing tax-subsidized apartments to more affluent tenants. In the New York area, the median income in four years has increased from $84,000 to $104,000 for a family of four, driven by gains for the already wealthy. A family at the tax credit program’s upper limit of 60 percent of the median income today makes $12,000 more a year than one that would have qualified four years ago—and thus pays $300 more a month in rent. Speliotis says she would prefer a different strategy. She is keeping incomes and rents right where she’d planned, “because we want to house people.”


COMMUNITY-BASED developers of affordable housing find themselves in the ironic position of defending a dubious trickle-down tax subsidy, on which they depend—against an even worse trickle-down tax policy, the Trump tax cuts. The tax credit system at its foundation depends on the federal government subsidizing transactions for bankers and for-profit developers, enabling them to make a living vastly more comfortable than that of the tenants who will occupy their apartments. Projects pay out gains to investors. There are also syndication fees, and management fees.

And that’s just up front. Over time, the private money that washed in washes out. Investors can take their capital out at the end of ten years, when the tax break expires, leaving developers on their own to figure out how to pay for upgrades as buildings age—often going back to the government for refinancing and other aid, if they don’t already have subsidies such as HUD’s Section 8. Apartments’ affordability is assured for just 30 years, and a loophole allows them to move to market rate as soon as 15 years. Half a million units are set to lose their affordability guarantees over the next decade. All this has occurred while Congress has drained aid from traditional public housing, resulting in predictable decay, and leaving stranded many poor tenants who earn too little to qualify for tax credit apartments without significant added subsidy.

In the quest to bring market efficiencies to affordable housing, the convoluted tax credit system leaks rivers. The resulting industry has become so invested in the business model, and banks so accustomed to a piece of the action, that should Congress ever entertain the notion of returning to the New Deal model of directly subsidizing permanently affordable public housing and cutting out private middlemen, it would face well-financed industry opposition.

“It’s complicated, which is why [HUD Secretary] Dr. Carson likes it—because a brain surgeon, he can understand it,” jokes David Dworkin, president and CEO of the National Housing Conference. “That’s how we could end up with a tax bill that cost us a quarter million units of affordable housing over ten years, and have that not be mentioned in the national debate.”

The LIHTC actually consists of two different credits. One, covering 30 percent of construction costs, works in tandem with tax-exempt housing bonds and is available on demand. It’s often used to insert affordable apartments into predominantly market-rate developments, generating the secondary social benefit of income integration in increasingly income-polarized cities. A more generous credit, for 70 percent of construction expenses, is also the subject of fierce competition between developers for a rationed slice of each state’s allocation from the IRS.

Atypically, in a badly divided Congress, the competitive credits have fervent friends on both sides of the aisle. When their value first plunged after the election in anticipation of a tax cut—slowing affordable housing production immediately—Democratic Senator Maria Cantwell joined with Republican Senator Orrin Hatch to lead the bipartisan push that this year resulted in a four-year, 12.5 percent increase in the number of credits issued. Their measure also empowers developers to average tenants’ incomes, putting more apartments in reach of the poor.

The tax credits’ bipartisan appeal dates to their origins, in response to the shock of an earlier tax cut. Buzz Roberts, now president and CEO of the National Association of Affordable Housing Lenders, was in 1985 a lobbyist for the nonprofit Local Initiatives Support Corporation, which helps community-based groups build housing and more. (This author is a volunteer advisory board member of New York City’s LISC affiliate.) Not only had Congress laid waste to housing-development subsidies; President Ronald Reagan’s cut in the top personal income tax rate from 70 percent to 28 percent had eviscerated the business of building affordable housing as a tax shelter for high-income individuals.

When Roberts and other advocates pressed House Ways and Means Committee Chair Dan Rostenkowski to carve out a new path through a pending tax bill, skeptics on his staff told them to scram. But Republican Senator Bob Packwood seized on the idea of having private developers build quasi-public housing. Generous financial incentives, went the thinking, would spur investors to build and then keep projects well-run. The Low-Income Housing Tax Credit came into being in 1986 as a three-year experiment.

New York City became a high-profile proving ground for the LIHTC, sustained by Mayor Ed Koch’s effort to restore thousands of apartment buildings abandoned by their owners. Once demonstrated at the grassroots, the tax credit attracted a prosperous for-profit industry alongside the nonprofits.

In the program’s favor: a pile of independent studies documents the tax credits’ positive economic and social impacts, which tend to outperform traditional public housing. Tax credit buildings tend to be located in neighborhoods with better schools, environments, and opportunities than traditional public housing; raise property values in low-income areas; and open up possibilities (though too often unrealized) for integration in suburbs and high-wealth areas.


TODAY, GOVERNMENT IS undermining affordable housing policy on multiple fronts. Not only does the Tax Act reduce the benefit of the LIHTC; the remaining forms of direct aid to housing, such as the Community Development Block Grant and Section 8 voucher aid, are also at risk because of the need to pay for the costs of the tax cut.

As homeownership becomes less affordable, more people rent despite a severe shortage of affordable rental housing. As the number of renting households grows, the share of income devoted to rent has risen, in many cases crushingly so: The Pew Charitable Trusts finds 38 percent of tenant households are rent-burdened, spending more than 30 percent of pretax income on rent; 17 percent spend more than half.

Also on the line is the survival of what remains of the nation’s public housing, as federal subsidies lag behind the cost of upkeep. Congress in its budget bill expanded to 455,000 the number of public housing units that can participate in Rental Assistance Demonstration, a U.S. Department of Housing and Urban Development program that converts public housing funding to aid to private investors and managers, enabling them to borrow in the bond market to finance renovations—and tap the accompanying tax credits.

A sobering takeaway from the broad support for LIHTC, at a time when federal anti-poverty and direct housing programs are coming under renewed political attack: Give banks and businesses a piece of the action, while delivering visible, even transformative results, and you build the most popular program on the block. The nation’s taxpayers and renters surely deserve better. 

You may also like