Housing Credit History
The Low-Income Housing Tax Credit (Housing Credit) was signed into law by President Reagan in the Tax Reform Act of 1986. It was first expanded and made permanent under President Clinton in 1993, and further strengthened under President Bush and President Obama, reflecting its strong bipartisan support. Senators Maria Cantwell (D-WA) and Orrin Hatch (R-UT) introduced the Affordable Housing Credit Improvement Act of 2017 to expand the Housing Credit by 50 percent and enact other provisions to further strengthen the Housing Credit.
Since 1986, the Housing Credit has financed the development of 3 million apartments, providing affordable homes to roughly 7 million low-income families. The development of these apartments has supported 3.4 million jobs, and generated $323 billion in local income and $127 billion in federal, state and local tax revenues. See the impact of the Housing Credit in every state and congressional district.
The Housing Credit Policy Landscape
Comprehensive tax reform was a top priority for the 115th Congress and the Trump Administration. In September 2017, leadership in the Trump Administration, House Ways and Means Committee and Senate Finance Committee issued a "Unified Framework for Fixing Our Broken Tax Code" that identified the Housing Credit as one of only two corporate tax expenditures explicitly retained in the framework, noting that it is a tax incentive that has “proven to be effective in promoting policy goals important in the American economy.” The Housing Credit's inclusion in the plan is a testament to the program's successful track record, the need for resources to address our nation’s vast and growing shortage of affordable housing, and the strong bipartisan support that the ACTION Campaign and its members have built over many years.
House Tax Reform Bill
Drawing on the tax reform framework, House Ways and Means Committee Chairman Kevin Brady (R-TX) released the "Tax Cuts and Jobs Act" on November 2. This bill would lower the top corporate tax rate from 35 percent to 20 percent, retain the Housing Credit with no proposed modifications, and eliminate the tax exemption on private activity bonds, including multifamily Housing Bonds, which provide critical financing to roughly half of all Housing Credit developments.
Despite maintaining the Housing Credit, the House tax reform bill would devastate production under the program by eliminating private activity multifamily Housing Bonds. Coupled with the lower corporate tax rate, which would reduce investor interest in the Housing Credit without other changes to the Credit, the loss of Housing Bonds could reduce annual production by up to two-thirds annually, a loss of the future supply of affordable rental housing by nearly one million units. On November 16, the House passed its version of the Tax Cuts and Jobs Act and the Senate Finance Committee reported its version of the bill out of committee on a party-line vote.
Senate Tax Reform Bill
Senate Finance Committee Chairman Orrin Hatch (R-UT) released the Senate's version of the Tax Cuts and Jobs Act on November 9 with marked improvements from the House bill. The Senate bill proposes to reduce the top corporate tax rate from 35 percent to 20 percent, retain the Housing Credit, and preserve the tax-exemption on private activity bonds, which includes multifamily Housing Bonds. The bill does not, however, provide any changes to the Housing Credit to preserve its production potential in a 20 percent corporate tax rate environment. According to Novogradac & Co., absent any change to the Housing Credit, the lower corporate rate would translate into a loss of roughly 200,000 affordable rental homes over the next ten years.
Chairman Hatch then introduced a "modified Chairman's mark" with updates to the bill, including several no-cost provisions to strengthen the Housing Credit, taken from the Affordable Housing Credit Improvement Act (S. 548). While the remaining provisions in the Affordable Housing Credit Improvement Act have broad bipartisan support, they would cost money (though in many cases minimally), and so were not included in the modified mark due to budgetary pressures.
The House and Senate each appointed a conference committee to negotiate differences between the two bills. The conference committee filed a conference report on the Tax Cuts and Jobs Act on December 15, and the House and Senate passed this version on party line votes. President Trump signed the tax reform bill into law on December 22. See our overview of provisions in the House and Senate versions of the Tax Cuts and Jobs Act that would impact affordable housing.
The ACTION Campaign thanks Congress and the Administration for preserving the Housing Credit and multifamily Housing Bonds. Together, the Housing Credit and Housing Bonds finance nearly all affordable housing development in the U.S. Read our statement on the Tax Cuts and Jobs Act and our letter to Congress and the Administration in support of the Housing Credit and Housing Bonds in tax reform.
Advocacy in 2018
An analysis by Novogradac & Co. estimates that the final version of the tax reform bill would reduce affordable rental housing production by nearly 235,000 homes over the next decade due to the lower corporate tax rate and a change to the Credit’s inflation calculation. The vast majority of the impact comes from the loss of investor equity resulting from the reduced corporate rate. The base erosion and anti-abuse tax (BEAT) could have a further negative impact on the Housing Credit equity market, which we are now working to analyze.
GOP leadership has indicated they will consider a follow-up tax bill in 2018, and ACTION will continue advocating for modifications to keep the Housing Credit whole in technical corrections or other follow-on tax legislation. This includes advocating for modifications to the Housing Credit formula to sustain the Credit’s production potential even under the reduced corporate tax rate, as well as modifications to offset the potentially negative impacts of BEAT.
How the Housing Credit Works
The Housing Credit is administered by the Department of Treasury, which issues tax credits to state Housing Credit allocating agencies based on the state's population. The allocating agencies develop Qualified Allocation Plans (QAPs) that include selection criteria, based on local priorities, to guide the type and location of affordable housing developed in each state. Developers submit applications to receive Housing Credits, and the credits are awarded to the most qualified developers through a highly competitive selection process. On average, state Housing Credit allocating agencies receive applications requesting more than three times their available authority.
Financing and Development
Developers sell the tax credits to investors in exchange for equity capital through a process called "syndication." With capital from investors, developers can limit the amount of money they need to borrow for construction, which reduces the developers’ debt so that they can keep rents affordable. Without an incentive like the Housing Credit, it is simply not financially feasible for the private sector to build affordable homes for the families that need them most.
Once a Housing Credit development is completed, meets all requirements and is occupied by low-income tenants, the investors are able to begin claiming tax credits to reduce their federal tax liability. While the credits are awarded over a ten-year period, they can be recaptured any time in the first fifteen years if the development falls out of compliance, and the development must remain affordable for a period of at least 30 years. This unique financing structure means that the private sector - not the government - bears the financial risk, which has led to a high degree of private sector oversight. State Housing Credit allocating agencies also monitor developments closely for compliance.
Investment in the Housing Credit is also a designated activity under the Community Reinvestment Act (CRA), meaning that certified crediting institutions, such as banks, can also meet CRA obligations by investing in the Housing Credit.
Affordable Housing Impact
Low-income families whose income are at or below 60 percent of the area median income (AMI) are able to rent Housing Credit properties, and rent payments are capped at 30 percent of the income limit for each apartment. The roughly 3 million apartments financed by the Housing Credit have provided affordable homes to more than 6.7 million low-income families over the past 30 years, making it easier for them to afford other necessities like health care, transportation and nutritious food.