Baltimore’s Homeless Youth: The Cost of Eliminating the Low-Income Housing Tax Credit Market

The Low-Income Housing Tax Credit (“LIHTC”) is one of the most important resources for creating affordable housing in the United States today. Created by the Tax Reform Act of 1986, the LIHTC program gives State and local LIHTC-allocating agencies the equivalent of nearly $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. An average of over 1,420 projects and 107,000 units were placed in service annually between 1995 to 2014.

The affordable housing industry is experiencing a market slow down not experienced since the Great Recession.  And, with Republicans in Washington promising tax reform, LIHTC investors are anxious. President Trump’s pledge to reduce the corporate tax rate from 35 percent, to 20 percent, or even as low as 15 percent, is putting the brakes on this segment of the housing market.

In general, tax credits are more attractive than tax deductions because tax credits offer a one-to-one, dollar-for-dollar deduction in federal income tax, whereas deductions reduce taxable income. With LIHTCs, investors also receive tax losses based on their investments in real property. A reduction in the corporate tax rate would not take away that dollar-for-dollar reduction, but the tax losses that investors receive do change with the rate.

A recent review of corporate tax reform on the LIHTC market by a public accounting firm that does extensive work with the LIHTC industry found that “lowering the top corporate tax rate from 35 percent could lower the investor equity price per credit by as much as $0.17.” According to the same study, such a shift in pricing could reduce the amount of equity available to build affordable rental housing by as much as $2.2 billion or more. With $13 billion in equity raised in 2015 for LIHTC projects, a reduction of this magnitude could result in as many as 16,000 fewer affordable rental homes constructed or preserved each year.

In Baltimore City, more than 1,400 young people under the age of 25 are without a safe, stable, and affordable place to call home, so a slowdown in the creation of affordable rental housing is of concern. Housing is the one of the most significant service gaps affecting unstably housed youth in Baltimore City. According to one report: “Most unaccompanied homeless youth have issues in their life that need to be addressed in addition to their housing instability, such as finding employment, social-emotional well-being, and dealing with mental health or substance abuse issues. However, effectively resolving these problems is nearly impossible without a safe, stable, affordable, and long-term place to call home.” Research estimates that first providing housing and then focusing on service provision can save up to $40,000 of public funds per person each year.

With LIHTC threatened by proposed tax reform, it is important that civic and private leaders act to champion and protect the Low Income Housing Tax Credit. Understanding the impact of lowering the corporate tax rate on LIHTC cannot be understated. In addition to opposing the elimination or the pairing back of LIHTC, now is the time to embolden support for our nation’s premier incentive responsible for 90% of all affordable housing developments built each year.

The following legislation seeks to strengthen the Low Income Housing Tax Credit:

  • The Cantwell-Hatch Affordable Housing Credit Improvement act of 2017 (S. 548), and;
  • The Tiberi/Neal Affordable Housing Credit Improvement Act of 2017 (H.R. 1661).

This blog was written by Benjamin Guthorn at Miles & Stockbridge.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Accessing this blog and reading its content does not create an attorney-client relationship with the author or with Miles & Stockbridge. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.