Despite signature legislative achievements and a bipartisan effort to lower inflation, the White House and Congress have neglected to address an issue affecting Americans of all backgrounds and in every community: a devastating shortage of affordable housing. Housing costs are a major factor in core inflation and a threat to long-term American growth — and the federal government needs to step up and address it now.
It has done so in the past, with historic investments in public housing, loans to veterans and other programs that helped Americans get stably housed throughout the 20th century. While such sweeping changes are unlikely in the short term, President Biden and Congress have the power to remove a major barrier to increasing affordable housing supply by exempting affordable housing projects from the federal volume cap on state’s private activity bonds (PABs) issuances. And they can do it this year.
This small but powerful tweak to the federal tax code can happen this year. And, if it happens, Washington will help states – which don’t have the ability to address this crisis alone – unlock new resources and build the affordable housing they desperately need.
The change is simple, straightforward and transformative. Private activity bonds come with as-of-right Low-Income Housing Tax Credits (LIHCs), the primary federal resource for financing low-income housing, which provides equity for affordable housing development. In other words, PABs are one of the most vital financial tools to build and preserve affordable housing nationwide.
But their impact is currently kneecapped by an arbitrary federal limit on their usage.
Right now, each state has a “volume cap” that restricts the number of tax-exempt PABs it can issue. States use PABs because they cannot fight the housing crisis on their own. Local funds only go so far – and are inherently more limited – and require pairing with federal tax credits for more financial leverage to build housing.
But that cap has increased only about 16 percent over the past decade, even as the housing crisis has gotten significantly worse: There are only 26 affordable apartments available for every 100 extremely low-income renter households, and the United States produced 5.5 million fewer homes in the last 20 years than it did in the previous 20.
Many states issued record levels of PABs for housing in 2019 and 2020 — and not just the usual suspects like New York, Texas, Florida and California. So did Maine, North and South Carolina, Utah, Oregon and Montana. Thirteen others issued more than their annual cap in 2019, including Kansas, Georgia, Nebraska and Tennessee. As a result, states of all stripes – red states, blue states, urban states and rural states – are reaching their maximum allowable PAB issuance.
Federal policy, it turns out, is outdated, and it is harming Americans everywhere.
The impact of this change will be truly transformative, even if it is simple. By exempting PABs used on affordable housing projects from the arbitrary cap, Congress can help states unlock their full potential to address the supply crisis at scale, preserving existing Department of Housing and Urban Development (HUD)-assisted housing and spurring the creation of new affordable housing.
That’s not all. Because of the many competing uses for PABs – which are almost exclusively used for housing – Congress will help states use PABs for other important infrastructure needs, like carbon capture facilities and broadband projects, which are now eligible for PABs under the Infrastructure Investment and Jobs Act.
And it’s been done before. Exemptions have been made to state volume cap for 17 activities, including large-scale infrastructure projects such as airports, education facilities and other important initiatives — allowing localities to build critical infrastructure that is also desperately needed. Faced with the housing crisis, there is no reason not to do the same for housing.
Congress had the chance this year to make bold investments toward affordable housing, but it failed to do so. There is still time. An end-of-year package to address expired and expiring tax provisions provides one last opportunity to make this simple change that could more than double the housing supply in New York.
Alternatively, Congress could lower the 50 percent test, another artificial limitation placed on states, that requires 50 percent of a development‘s qualified development costs be financed by PABs to be eligible for LIHTC. By bringing some PABs relief to states, Congress will show that it has not forgotten about housing after all.
Rachel Fee is the executive director of the New York Housing Conference.