Affordable housing under threat from GOP tax plan
The tax bill passed by the U.S. House last week would drastically constrict efforts to build and improve homes for low-income families in the Triangle, according to local affordable housing experts.
The Republican-backed bill would eliminate the tax-exempt status for bonds that allow private investors to be eligible for tax breaks.
This kind of tax-credit financing is critical to large affordable housing efforts in urban areas, including the Triangle, where there is a shortage of homes for low-income residents. If the tax credits are eliminated, advocates say, it will be harder to find investors willing to finance affordable housing.
“The number of units that can be produced will go down,” said Gregg Warren, executive director of DHIC, a local nonprofit developer. “That’s incredibly frustrating, given the rising demand for affordable housing here in Raleigh.”
DHIC is using tax-credit financing to rebuild Washington Terrace, a 234-unit affordable housing project in Southeast Raleigh. The group also has plans for a $40 million rehab of Capital Towers in North Raleigh, a 298-unit complex for low-income senior citizens.
“Without private activity bonds and their tax-credit equity, we could be short about $10 million,” Warren said of the Capital Towers project.
Last spring, Raleigh’s department of housing and neighborhoods recommended approval of 729 tax credit-financed affordable housing units. Of those, 589 relied on tax exemptions that would no longer be available under the House bill, said Larry Jarvis, director of the department.
Jarvis sent a memo Nov. 8 to the City Council that included direction from the North Carolina Housing Coalition on how to broach the subject with lawmakers. The coalition estimates the change would cost the state 9,340 affordable homes. Mayor Nancy McFarlane has sent letters urging the state’s representatives and senators to preserve the bonds, Jarvis said.
The Senate’s tax-reform bill, which is set for a vote on Friday, would keep the tax-exempt bonds.
Affordable housing has been a hot topic in the Triangle as home and rent prices continue to rise and neighborhoods near downtown Raleigh continue to gentrify. Officials say Wake County is losing between 400 and 550 affordable housing units every year.
Under tax-credit financing, government agencies (such as the Wake County Housing Authority) secure bonds for developers at lower borrowing costs. Then the developers (including DHIC) sell the tax-credit equity bonds to investors. In exchange for buying the bonds, investors get a tax credit equal to a certain percentage of the investment’s value.
Local government contributions to affordable housing have grown as federal support has declined in recent years. But local taxpayer money is rarely sufficient on its own to pay for large-scale affordable housing without tax-credit financing.
Raleigh now dedicates about $6 million a year in local money toward affordable housing projects.
Private investment in affordable housing is especially important in states such as North Carolina, where local governments can’t require developers to rent or sell housing at affordable rates.
The House bill would also nix the new markets tax credit, which encourages new home construction in distressed areas.
Habitat for Humanity of Wake County just closed on a $300,000 financing deal based on that credit, and Habitat’s national finance office was recently awarded $55 million in new markets tax credits, said Executive Director Kevin Campbell.
Cutting tax exemptions is one way House Republicans want to offset the impact of tax cuts elsewhere, including a proposed reduction of the corporate tax rate from 35 percent to 20 percent.
“Lowering tax rates has a big impact on revenue, and I think they’re trying to recapture some of this revenue by targeting some of these more obscure, technical things in the tax code that don’t have broad appeal,” Campbell said. “I think that’s the strategy.”
There are some critics of tax credits. The Low Income Housing Tax Credit program, which administers the credits, costs the federal government money in the form of taxes not paid. An NPR/PBS investigation earlier this year showed that the amount of tax revenue lost to the investments has climbed as the number of housing units has dropped.
Even if the tax breaks emerge unscathed from the tax overhaul, experts say lower corporate taxes would make tax-credit deals less attractive to investors.
“If you have lower taxes to start with, there’s less incentive for you to go out and invest in these kinds of properties,” said Scott Farmer, executive director of the North Carolina Housing Finance Agency, which administers private activity bonds throughout the state.
If the bonds are eliminated, Farmer estimates the agency would distribute about $700 million less in bond financing the following year.
Speculation about tax reform has already reduced the amount of financing developers can get in return for each credit, Jarvis said.
“Just the very talk of tax reform that began right after the election sent signals to the market that the value of the credits would be lower going forward,” he said. “The market’s already made that adjustment, though it probably would be worse if the bill passes.”
Gargan: 919-829-4807; @hgargan