Effects of Tax Reform on Affordable Housing

Effects of Tax Reform on Affordable Housing

Posted on November 28, 2017

Often lost in the broader political conversation around tax reform are the effects of tax law on affordable housing. It was the last major tax overhaul in 1986 that created the Low Income Housing Tax Credit (LIHTC), setting a course for private investment to become the cornerstone of affordable rental housing development for these past 30+ years.

Both the House tax bill and the expected Senate version retain the much-coveted 9% LIHTC program, with lawmakers clearly seeing the value of this important generator of rental housing new construction projects around the country. However, the House bill as passed would do away with the lesser known – although much more prolific overall – 4% LIHTC by removing the tax exemptions for Private Activity Bonds, which is the only way to access these tax credits. In California, approximately 80% of affordable rental housing units are built or repaired through the 4% LIHTC program. Last year this amounted to over 20,000 affordable homes in our state!

Both the House bill and the likely Senate bill also will dramatically lower corporate tax rates from 35% to 20%. Regardless of one’s view about whether this will be advantageous to the overall economy, there is one unquestioned effect – the value of LIHTCs will plummet. We have already seen a reduction in pricing for our current tax credits, merely because of the prospect of corporate tax relief.

By far the largest housing subsidy program in America is the Mortgage Interest Deduction taken by homeowners who itemize on their tax returns, the vast majority of whom are not low income. The House bill would limit this deduction to $500,000 in mortgage borrowing, while the Senate bill is expected to maintain the status quo (which caps the deduction at $1 million). While we would prefer the House proposal to dedicate increased tax revenue from such a change to affordable low-income housing assistance we applaud the courage to take on this sacred tax break.

Ultimately, if tax reform is to happen in the current Congress, the final product will be a hybrid that both the House and Senate must pass. Our preferences would be (1) maintain the tax exemption for Private Activity Bonds and thereby 4% LIHTCs, (2) a more modest reduction in the corporate tax rate – somewhere between 25% and 30%, and (3) limit the mortgage interest deduction to a single residence with a $500,000 cap. If you care about affordable housing, it would be a good idea to let your legislators know how you feel in the next week or two as final decisions are made.

To contact your legislators, call the Capitol Switchboard at (202) 224-1321 or click here to find your representative.