Will the LIHTC Be Abolished?

The very existence of LIHTC appears to be at risk. How likely will the housing program survive tax reform and budgetary pressures?

There is a story that there are 10 cookies on a table. Around the table sit a CEO, a member of the Tea Party and a union worker. The CEO takes nine of the cookies and tells the Tea Party member that the union worker is taking the cookie on the table.

That tale might be one to keep in mind as we head into the post-election year of 2013, when the government may be ready to continue to push for radically lower income taxes for corporations and high-income earners, while cutting spending on the social safety net. Housing programs, in particular the Low Income Housing Tax Credit (LIHTC) program, may or may not be impacted as federal, state and local budgets are cut.

Sixteen years after it was enacted, the LIHTC program stands at a crossroads. A prime threat to the very existence of the LIHTC program itself is national tax reform. “We are taking the threat very seriously,” says J.P. Delmore, assistant vice president—federal legislative at the National Association of Home Builders (NAHB). “From the 10,000 feet level, we agree that tax reform presents a risk to the program.”

In listing the dangers to the LIHTC program, Robert Landis, senior vice president and director of asset management at Raymond James Tax Credit Funds Inc., notes that unfortunately, some of the key, long-time, congressional supporters of the LIHTC programs are retiring this year—for example, Rep. Barney Frank (D-Mass.) and Sen. Olympia Snowe (R-Me.).

“It is a little unclear who the torch bearers will be now,” says Landis. Another issue is that the new generation of members of Congress, who may not know the history of LIHTC, may see LIHTC as a spending program that is a part of the tax code rather than a very effective housing tool born out of tax reform in 1986 that leverages the resources of the private sector. “The other problem is that there is so much turnover in Congress that there may be a lot of congressmen who might not understand the program,” says Landis.

Under tax reform, as proposed for example by the Obama-appointed chairs of the Bowles-Simpson commission to reduce the federal deficit, the corporate income tax rate will be lowered. But in exchange for the greater benefit of bringing down the highly progressive rate of taxation, a whole host of corporate tax deductions, tax credits and “loopholes” will be eliminated. And therein lies the threat to the existence of the LIHTC program. Being a tax credit, LIHTC may be a prime target or collateral damage. “That is where the LIHTC program’s vulnerability lies,” agrees Landis.

While fallout from the budget shortfall at the federal level may impact the heart of the program’s existence, budgetary concerns at the state and locals levels are also creating obstacles for the housing credit program. As an example of the potentially serious consequences of states’ financial struggles, the California Supreme Court at the end of last year upheld the state bill eliminating redevelopment agencies. More than 400 redevelopment agencies—which had, up to now, comprised a primary source of gap financing for LIHTC projects in California—were affected. Several hundred projects and up to $1.7 billion in redevelopment funding could have been lost in 12 months, reports an MHN feature article [click here for article by Jeff Steele, contributing editor]. “Certainly in California, it is going to be devastating,” comments Ronne Thielen, chair of the board of the Affordable Housing Tax Credit Coalition and executive vice president of R4 Capital. As much as 20 to 30 percent of tax-credit project costs can be financed by funds originating from the redevelopment agencies, estimates Thielen. She adds the full impact of the funding termination will be seen in another year, when the last of the projects receiving commitments have been delivered.

The good news is that the elimination of redevelopment agencies in particular is not likely to become a trend that will spread to the rest of the country. Tom Murphy, senior resident fellow of the Urban Land Institute and former mayor of Pittsburgh, says he is not aware of any other state that allows funds from redevelopment agencies to be returned to the state if they were abolished, which was a major driver behind the agencies’ elimination in California. Also, there are a number of states with lower housing development costs than, for example, California or New York. These states may have less of a reliance on gap financing and therefore redevelopment agencies and other sources of gap financing, says Murphy.

While there appear to be mortal dangers to the LIHTC program at the federal level, there are also reasons to believe the program will not be abolished. In fact, Landis says that most in the industry do not believe the LIHTC will be done away with completely. “We don’t expect much change in the near term,” agrees Michael Gaber, COO of WNC and Associates Inc. Gaber adds that while other tax credit programs must be extended annually, the LIHTC is a permanent program. Moreover, the housing credit program is not a major part of the budget, he points out.

“The concern now is that someone will tinker with the rules so that less housing will be created,” says Landis. However, Gaber argues that although Congress could consider reducing the LIHTC program to close the budget gap, “we don’t see that as likely.”

One point in favor of the housing tax credit is its success—and the lack of any scandals associated with it. “This is a squeaky clean program,” says Landis. LIHTC, which has produced some 2.4 million rental housing units since 1986, “has been remarkably successful for 25 years. No other programs in the history of the U.S. has created more housing more efficiently,” asserts Landis. In fact, “the IRS stopped random audits of LIHTC properties because it was not finding enough wrong with projects to make its efforts worthwhile,” notes Landis.

LIHTC has also been a bipartisan program that typically receives support from both sides of the aisle: Democrats favor the program because it helps produce affordable housing for those in need, while Republicans look positively on the program because it reduces taxes for corporations and elicits the involvement of the private sector, rather than the government, in producing affordable housing. And the program is run by a network of state financing housing agencies and the existing Internal Revenue Service without much need for “big government.”

Indeed, the housing credit program allows for classic public-private partnerships that bypass the need for direct “big government” involvement. One of the NAHB’s tasks in the interim is to lay the groundwork for 2013 by educating the newer generations of lawmakers on these and other points. When members of Congress understand how LIHTC works, they will see that “what’s being created is an ideal public-private partnership” that many congressmen will agree is how government ought to be run, says NAHB’s Delmore. With regards to federal tax reform initiatives next year, congressmen may see that many of the same lines of reasonings have already been traced—back in 1986-—and the product was LIHTC. “Many do not realize that the housing tax credit was born out of tax reform. It is useful to walk them through that history,” says Delmore.