Low Income Housing Tax Credits: Who Benefits? - TribPapers

Low Income Housing Tax Credits: Who Benefits?

East Haven Apartments, a project of Mountain Housing Opportunities, was built with $8 million in tax credits, $1.25 million from the North Carolina Housing Finance Agency, a HOME award with a $75,000 match from Buncombe County, $1.35 million from the Integrated Supportive Housing Program, and $500,000 from the Federal Home Loan Bank.

Asheville – The Buncombe County Commissioners are interested in pursuing Low-Income Housing Tax Credits (LIHTCs) to increase affordable housing stock. The US Treasury allocates LIHTCs among the states, which award them to developers of affordable housing projects. Awards are made in a very competitive process to projects that rent-control a percentage of units and satisfy other criteria. While they’re not cash payouts, the Department of Housing and Urban Development estimates LIHTCs short the federal government $8 billion, on average, each year.

On the surface, LIHTCs appear as a bad idea. Introducing layers of administration typically comes with costs like payrolling administrators. Involving government bureaucracies is cynically viewed as overpaying disinterested paper-pushers that creates a monopoly that can afford to bungle things.

Supporters of LIHTCs, however, argue that unmitigated developers doing business in a competitive market will selfishly build for profit instead of charity. In contrast, they argue, government is populated by those angels James Madison once argued would require no oversight.

Back in 2017, Chris Edwards and Vanessa Brown Calder of the Cato Institute found things otherwise. Their article, “Low-Income Housing Tax Credit: Costly, Complex, and Corruption-Prone,” states, “studies suggest that investors, developers, and financial companies gain most of the benefits.”

At the time, the authors estimated the 4% LIHTCs, over their 10-year life, were equivalent to 30% of project costs; the 9% credits. Developers typically sold these credits to large financial institutions for construction cash, leaving the wealthy investor’s healthy tax credits for a decade. While following the money would be a textbook case study in corporate welfare, it’s the process that drives up housing costs.

The bureaucracy established for handling the credits is a labyrinthine. In 2017, the authors noted Novogradac’s handbook for the credits was over 1,400 pages, and the same company published supplementary information in its monthly tax credit journal.

The federal government requires states to develop annual plans for administering LIHTCs. These plans must be approved by the federal government. The authors said these programs can run 80 pages long and prove quite nit-picky. Virginia’s plan requires, “composite material … at some portions of exterior doors.” In addition to exerting upward pressure on pricing, tight details like this in rigid law can thwart innovation.

Developers then have to agree to rent-controlling 20% of the units for households earning no more than Area Median Income (AMI) or 40% for households earning no more than 60%. Then, they must cobble together financing, which normally consists of subsidies from multiple government programs, each with its unique rules and regulations.

A study published in 2009 by the State of Washington concluded a LIHTC project, “generally takes twice as long to assemble the financing as market-rate projects, and contributes to increased legal and other transaction costs.” More recently, in 2016, Smart Growth Seattle reported a lot of LIHTC projects cost more than twice as much as market-rate construction. Since more expensive projects are better candidates for the credits, developers have an incentive to raise costs while there are no penalties for not lowering them as construction proceeds.

After construction, landlords must administer the rent-controls, with requirements for tracking the income, assets, family structure, and more of tenants. Failure to comply with regulations can cause the landlord to forfeit the credits in the first 15 years and face legal action in the second. The audits and administration are not free; the authors estimated all 50 states combined were spending over $100 million a year on LIHTC administration. “The program is aimed at helping needy people, but the salaries of the lawyers, accountants, and administrators handling LIHTC activities are overhead costs for that help.”

The authors further claim the LIHTC process is full of fraud and abuse. After citing four examples of developer fraud, they turn to government improprieties. In Dallas, in 2010, for example, 14 government officials and developers were convicted of, “bribery, extortion, and related crimes.” For all the oversight the program requires, the IRS’s auditing of the program has come up wanting.

But does it work? Edwards and Brown Calder don’t think so. They point to the number of other programs tapped to cobble together LIHTC financing as one illustration. What’s more, the GAO concluded LIHTC rents ran 19%-44% higher than rents subsidized with vouchers. A 2005 study published in Housing Policy Debate found LIHTC rents running 66% higher than those with vouchers in Miami.

Comparing LIHTC rents to free-market rents would be impossible because governments impose too many regulations with costs of compliance on developers to consider any jurisdiction a free market. The authors did, at least, cite several studies that concluded LIHTCs were crowding out otherwise market-rate housing. That is, increases in housing stock in communities that used LIHTCs were not statistically different from those of comparable communities.

In 2005, Harvard economist Edward Glaeser found costs of compliance with building regulations in San Jose, San Francisco, and Manhattan ran as high as construction costs themselves. Edwards and Brown Calder add that instead of providing low rents in a few projects with LIHTCs, it would be more equitable to lower rents everywhere by getting rid of building codes that have nothing to do with health or safety. Edward Pinto, considered an authority on the subject, described the kind of housing that would result as, “economical by design, making it naturally affordable, not expensive housing made affordable by subsidy.”

Edwards and Brown Calder state, “It does not make sense for the federal government to subsidize housing affordability while local governments neutralize their efforts with artificial barriers to housing supply.” Yet, the problem persists. Scapegoating politics, they suggest, “the LIHTC receives support from Republicans because it is a tax break, and it receives support from Democrats because it is a welfare program.”

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