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, and on December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. Prior to the final bill, the House and Senate passed very different versions of tax legislation, with widely varying potential impacts for affordable housing. The most notable difference was the House’s proposal to eliminate private activity bonds, including multifamily Housing Bonds, which finance roughly half of all Housing Credit developments. Their repeal would have meant a loss of up to 881,000 affordable rental homes over 10 years. Fortunately, in large part due to the strong bipartisan support that the ACTION Campaign and its members have built over many years, the final bill retained both the Housing Credit and multifamily Housing Bonds. While the inclusion of these critical affordable housing financing tools was a major advocacy success and a testament to the programs' strong track record, the new tax system presents concerns for future affordable housing production.
The Tax Cuts and Jobs Act lowered the corporate tax rate from 35 to 21 percent, which impacts pricing for the Housing Credit, and ultimately affordable housing production. A recent analysis by Novogradac & Co. estimates that the tax reform bill will reduce affordable rental housing production by nearly 235,000 homes over the next decade, the vast majority of which comes from the reduced corporate rate. The Tax Cuts and Jobs Act also created a base erosion and anti-abuse tax (BEAT), which could also have a further negative impact on the Housing Credit equity market.
In March 2018, Congress passed The Consolidated Appropriations Act of 2018, which included two key provisions from the Affordable Housing Credit Improvement Act. The first was a 12.5 percent increase in Housing Credit allocation authority over four years (2018-2021). While this is not as significant an increase as the 50 percent phased-in permanent cap increase proposed in S. 548, it provides a substantial level of new resources and will allow for the construction or rehabilitation of an additional 28,400 affordable rental homes over the next decade. This is the first expansion of the Housing Credit in over ten years.
The omnibus spending bill also provided a new option for income averaging on a permanent basis. Income averaging would allow Housing Credit units to serve households earning up to 80 percent of area median income (AMI), offset by deeper targeting in other units to maintain average affordability in the development at 60 percent AMI.
Though the increase in resources and new flexibility authorized by the omnibus represent positive developments for the future supply of affordable rental housing, nearly 90 percent of the lost production due to tax reform remains.
Advocacy in 2018
The temporary 12.5 percent increase in Housing Credit allocation will not fully make up for the projected loss of Housing Credit production as a result of tax reform, but it serves as a meaningful first step. ACTION will continue advocating for modifications to strengthen and expand the Housing Credit in 2018 through passage of the Affordable Housing Credit Improvement Act, which would increase the Housing Credit allocation by 50 percent and make nearly two dozen changes to strengthen and streamline the program. This legislation will not only restore affordable housing production in light of the Tax Cuts and Jobs Act, but make a meaningful step towards addressing our nation's vast and growing shortage of affordable housing. ACTION will also continue educating members of Congress about the critical role that multifamily Housing Bonds play in the Housing Credit program.
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 3 million apartments financed by the Housing Credit have provided affordable homes to roughly 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.