The Federal Debate over Spending Cuts

Preserving the Low-Income Housing Tax Credit is just one of several high-priority issues to watch.

Last December, the National Commission on Fiscal Responsibility and Reform, a bipartisan group of members of Congress convened by President Obama to address the nation’s deficit, approved a controversial plan to balance the federal budget by cutting nearly $4 trillion in spending. Although the final vote of 11-7 fell short of the 14 votes needed to submit the report to the full House and Senate for votes, the debate is far from over.

Some of the recommendations of the so-called Deficit Commission will no doubt be picked up by Congress this year as lawmakers look for ways to cut spending. Because some of these proposals could adversely affect property owners and managers, many housing industry experts are concerned.

MHN spoke to industry groups to discuss the intricacies of this debate. Here are the issues property owners and managers should keep an eye on.

Ending the LIHTC

The Low-Income Housing Tax Credit (LIHTC) program is an indirect federal subsidy that finances the development of affordable housing. Although the commission did not specifically call for getting rid of the LIHTC, it does recommend the elimination of most tax expenditures (meaning targeted tax rules such as deductions, eliminations and credits, such as the LIHTC). Expenditures on the program are estimated at $5 billion to $6 billion annually.

“The Deficit Commission’s recommendations aren’t explicit, but people in the housing industry agree that if you read between the lines, it’s calling for the elimination of the LIHTC,” says Rob Dietz, tax expert for the National Association of Home Builders (NAHB) in Washington, D.C.

Industry groups agree that should this happen, it would be extremely detrimental to the multifamily housing industry, in particular to owners of low-income housing.

Changing the depreciation period

The current tax code allows owners of residential rental housing to subtract the decline in the value of that property from the income they earn from it, in the form of deductions for “wear and tear,” or depreciation in value. The current depreciation period is 27-and-a-half years.

Again, while the Deficit Commission report was not explicit about its plans, depreciation deductions are considered a tax expenditure, so any changes to this part of the tax code would presumably be less beneficial for apartment owners. In particular, extending the depreciation period could make residential rental property less valuable. Dietz of the NAHB notes that in 1986, the last time the tax code was reformed, the depreciation period for commercial real estate was extended to 39 years: “The result was a dramatic decline in the value of commercial property,” he says.

Modifying the rules on mortgage interest

One of the Deficit Commission’s proposals is to change the mortgage interest deduction for home buyers from an itemized deduction to a 12 percent tax credit. The value of the current itemized deduction is equivalent to the owner’s marginal tax rate—in other words, if your tax rate is 25 percent, then every dollar of mortgage interest that you pay and report is worth 25 cents.

“If this were changed to the proposed 12 percent tax credit, the deduction would effectively be halved for the average taxpayer,” says Dietz. Although this would not affect owners of rental properties, it would affect developers of condominiums.

But not everyone in the multi-housing industry agrees that changing this rule would be a bad thing. In particular, the Washington, D.C.-based National Low Income Housing Coalition (NLIHC) believes that the mortgage interest deduction disproportionately benefits the wealthy. The NLIHC instead proposes a reform that would shift some of the money the government spends on this deduction (a whopping $104 billion in 2011) toward developing affordable low-income rental housing.

“The mortgage interest deduction is only available to about a third of all taxpayers—those who have a mortgage and who have enough income to itemize on their taxes,” notes Sheila Crowley, the NLIHC’s president and CEO.

The NLIHC argues for changing the deduction to a tax credit and capping it at $500,000 (the current cap is $1.1 million), then taking $15 billion of the money that would be saved and putting it toward the National Housing Trust Fund. This is a federal program that was created in 2008 to provide resources for developing or rehabilitating housing for extremely low-income families (defined as those earning up to 30 percent of the median income in their area). Apartment owners and managers who serve this population would benefit, Crowley notes, because they would receive capital for use toward building or fixing up properties.

Looking ahead

Whatever side of the mortgage-interest-deduction debate you stand on, it is too soon to predict exactly how it and the rest of the tax code will change, let alone how those changes will affect multifamily housing.

“This is an ‘inside the Beltway’ debate right now,” admits Dietz. “But as advocates, we’re doing due diligence, so we can get in front of the issues and be sure we’re not caught by surprise.”

Help save the LIHTC

The LIHTC is the largest federal program providing funding for developing new rental housing for low-income families and for rehabilitating existing housing. The NAHB has joined forces with other housing associations—including the National Multi Housing Council (NMHC), the National Council of State Housing Agencies and the Affordable Housing Tax Credit Coalition—to lobby Congress in support of the LIHTC. A second lobby group, known as the ACTION Network (, is facilitated by Enterprise Community Partners (a national nonprofit that packages low-income housing tax credits for purchase by investors) and includes the National Low Income Housing Coalition, the National Affordable Housing Management Association (NAHMA), NMHC and NAHB. “Whatever the tax code may look like in the future, our efforts are focused right now on making sure the LIHTC remains part of it,” says Michelle Kitchen, NAHMA’s director of government affairs.

Meanwhile, here are ways property owners and managers can help:

Call your lawmakers. Call the senators and representatives for your district to express your support for the LIHTC. Point out that the program not only creates housing, it creates jobs too—one per housing unit built, or 75,000 a year, according to the NAHB.

• Host a ribbon cutting. If you’re unveiling a low-income rental property, don’t be shy about it—hold a ceremony and invite local officials and members of the media. Talk to them about how the LIHTC helped finance the development and invite them to join the fight to save the program.

• Invite members of Congress to tour your property. Show them the buildings, let them see that it’s a well-built development and talk to them about how it contributes to the social fabric of the community.

Connect community members with elected officials. Find residents whose lives have been bettered through the LIHTC, or people who have gotten jobs because of it, and have them tell their stories to senators and representatives.

To comment on this story, email Diana Mosher at [email protected].

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