How to marry housing policy and tax reform for millions of Americans
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Numerous recent news articles from across the country highlight the impact of potential tax reform on the production and preservation of affordable rental homes financed through the federal low-income housing tax credit.

America’s most successful tool for encouraging private investment in affordable housing, the housing credit is responsible for nearly all of the affordable rental housing built and preserved since the program was authorized under President Reagan in the Tax Reform Act of 1986.

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These articles accurately reiterate the well documented growing affordable housing challenges in America and the delicate balance between federal tax and housing policy, bringing to light how the expected decrease in corporate tax rates has led investors to stop, reduce or slow investments in affordable housing. However, many of the stories inaccurately infer a problematic narrative that affordable housing advocates are against tax reform.

 

Tax reform in and of itself is not necessarily bad for the housing credit and may be positive for all parties, especially the housing credit’s true beneficiaries, the millions of veterans, seniors, working families, people with special needs and other residents who live in affordable housing.

Advocates must reinforce this message with the Trump administration and Congress, noting that we are committed to working with them to protect and strengthen the housing credit throughout tax reform, with an eye on at least maintaining, and perhaps expanding, current production levels to keep America’s housing affordability challenges from further harming our economy, communities, and families.

It is critical to note that creating and preserving affordable housing nationwide is almost solely dependent upon private capital investing in the housing credit.

And private capital, no matter how socially or community minded, is, upon final analysis, accountable to shareholders and a required return on investment, which is a key part of how the housing credit works. Private capital is held accountable to both its shareholders and to the federal government regarding the implementation of federal affordable housing policies.

Real estate market and private capital

The current dislocation in the housing credit market is likely temporary. In recent years, housing credit stakeholders have been lulled by the Sirens song that housing credit pricing will only rise. An old investment saying sums up the current market: markets go up in escalators and down in elevators. The housing credit market is not immune to this axiom.

Pricing, or the amount of equity capital that will be invested in exchange for $1 of housing credits, is the issue now. There is plenty of capital willing to invest in the housing credit, a proven investment with many of the largest financial institutions in America because of the private market discipline that investors require. Real estate risk management is but one aspect of housing credit pricing. Tax management has an interdependency in this asset class and when the value of the asset is impacted by expected marginal and effective tax rates, housing credit pricing changes.

This is the beauty of capitalism and the markets regarding the housing credit. It is the transfer of risk from the federal government to the private sector which governs the rate of return investors require given the asset class. The price per housing credit is pure capitalism allocating risk. Nothing more, nothing less.

Tax reform and the housing credit

Comprehensive tax reform is unimaginably complex, including both corporate and individual tax policy. The House Ways and Means and Senate Finance Committees led by Rep. Kevin BradyKevin BradyGOP agrees on one thing: ObamaCare taxes must go Overnight Cybersecurity: Trump tweetstorm on Russia probe | White House reportedly pushing to weaken sanctions bill | Podesta to testify before House Intel Senate expected to pass Russia sanctions bill for a second time MORE (R-Texas) and Orrin HatchOrrin HatchTime to get Trump’s new antitrust cop on the beat Live coverage: Senate GOP unveils its ObamaCare repeal bill Grassley doesn't see how Judiciary 'can avoid' obstruction probe MORE (R-Utah), respectively, are working long hours on a tax code that is fair, economically positive, and creates jobs.

Corporate tax reform, the part that will impact the housing credit, is politically and mathematically difficult. However, the housing credit is one part of the tax code that has bipartisan support. One can look for an example at the Cantwell–Hatch Affordable Housing Credit Improvement Act of 2016 that gradually expands the credit by 50 percent, allows for a fixed applicable multiplier for bond financed projects, and makes technical tweaks to enhance the efficiency of the housing credit.

After 30 years of success, the housing credit has done exactly what Congress intended it to do, which is transfer risk from taxpayers to private capital markets and create and preserve affordable housing.

Now, it is time for the housing credit and tax code to renew their policy vows. Corporate tax reform should not be feared by affordable housing advocates. With tax reform, Congress and the Trump administration, with support from the affordable housing industry, can lower tax rates, create jobs, increase gross domestic product (GDP), and expand the housing credit. We must embrace tax reform and this extraordinary moment to strengthen the housing credit.

Jeffrey Whiting is president and chief executive officer of City Real Estate Advisors (CREA) and president emeritus of the Affordable Housing Tax Credit Coalition.


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