Anticipation is mounting as signs in Washington indicate 2017 will be the year of tax reform. While lowering tax rates and eliminating tax breaks may be helpful in many areas, it does little to help low income families that need housing.
The federal government has been involved in helping to finance housing for low income families since at least 1937 when it enacted the Wagner-Steagall Housing Act. In 1986, President Reagan and Congress reformed the tax code. They replaced many of the housing subsidy programs with the Low Income Housing Tax Credit.
{mosads}At the time, I was a skeptic. I believed this funding mechanism was inefficient and wasteful. And at first it was. In the early years, the complexity inherent in the Low Income Housing Tax Credit made it difficult for developers to use and created a windfall for investors. But over time that has changed.
How big a role the federal government should play, and how much funding it should provide for housing, is debatable, but I think most of us would hope that whatever funding it does provide is delivered efficiently and used effectively. At this point, the Low Income Housing Tax Credit meets that criteria. Today, when these tax credits become available, states receive applications from quality projects for double or triple the amount available. They can choose those projects that provide the biggest bang for the buck.
One of the benefits of housing financed through the Low Income Housing Tax Credit is the strong, positive role played by private sector investors. Banks and corporations that invest make sure the projects they fund are well built and that the nonprofit and for profit developers who build and renovate the housing are fully capable of maintaining the properties. They also make sure that the residents meet the income guidelines set out by the federal government. Essentially, the risk shifts from the government to the private sector. The government only pays if the project succeeds.
This partnership approach has worked remarkably well. According to a study published by the Office of the Comptroller of the Currency, for those affordable housing properties placed in service between 1997 and 2010, the foreclosure rate was less than one percent. The housing stock funded with the tax credit has also been better built and better maintained than housing financed through other subsidy programs, in part because the returns to investors come over time rather than upfront.
I have advised government officials in Israel. One of the things that most impressed them about the affordable housing system in the United States was the way the players at the state, local and federal levels all worked together. Unlike earlier federal programs where the federal government dictated what could be built, the Low Income Housing Tax Credit allows state and local governments, as well as community groups, to determine what gets built in their neighborhoods. The federal government creates broad income eligibility guidelines, but the states and other local players have considerable discretion in setting priorities and determining which projects get funded.
The public sector is often accused of paying too much for goods and services. In the early days of the Low Income Housing Tax Credit, I thought the same—that it was a costly way to fund affordable housing. Over time the system has improved, the players have become comfortable with its rules, and the market for the housing credit has matured.
Could the Low Income Housing Tax Credit be improved? Absolutely. As a starting point, the amount of the housing credit should be increased so that housing can be built faster and less expensively, with less time and money spent securing funding from multiple sources. It would also be helpful to create incentives so that developers and investors benefit when they save money and complete projects on time and below budget. And it might be interesting to broaden the incentives so that the Low Income Housing Tax Credit works as an investment for individuals as well as corporations.
But when tax reform starts and this program is analyzed, Congress should carefully consider the hidden cost of replacing the Low Income Housing Tax Credit. It takes significant time and money to build the infrastructure of consultants and specialized companies in order to make a program like this one run smoothly.
We should all be concerned about ending a highly effective and important program prematurely. It is not perfect, but until a replacement has been presented, debated and tested, the Low Income Housing Tax Credit is the best funding mechanism we have. Maybe we can make it even better.
John H. Vogel Jr. is an adjunct professor at the Tuck School of Business at Dartmouth College and an associate faculty director for the school’s Center for Business, Government & Society. His research focuses on real estate, affordable housing, and social entrepreneurship.
The views of contributors are their own and are not the views The Hill.