Every legislative session, lawmakers are duped by rosy tax credit programs, sold as either robust jobs programs or silver bullets to our social woes.
This year HB2732, sponsored by Representative Ben Weninger, is being sold as both. The Low-Income Housing Tax Credit (LIHTC) program is a federal program by which qualified investors are incentivized to build housing projects for low-income persons with generous income tax subsidies.
How it works.
It is a sweetheart deal for banks, insurance companies and investors. The Arizona program allows for $8 Million a year of tax credits that can be matched with the subsidies offered through the federal program. The bills mirror the federal LIHTC percentages and can be carried over for 5 years.
To illustrate the business model, a $10 Million project qualifies for 9 percent tax credits. That is $900,000 a year and $9 Million over the course of the 10 year carry forward period. Banks sell these credits to other investors who make up a pool to finance the project. Some projects are even able to bridge financing gaps with other government programs. But not only are almost the entire project costs subsidized by the taxpayer, another $2.2 Million is generated through tax write offs from real estate losses, depreciation and interest expenses.
This mechanism is supported by many layers of middlemen who add to the cost of building these projects. As a result, the program is lucrative for investors, and very costly for the taxpayers.
How it actually doesn’t work.
For several years now, this program has been sharply scrutinized by various parties including the Office of Government Accountability (OGA), think tanks, and the media.
The overarching theme: this is a costly and inefficient program, susceptible to fraud and dubious in its impacts to shelter low-income Americans.
Much of the gamesmanship of the program revolves around the submittal of construction costs which the OGA determined varied drastically from state to state and project to project.
The average LIHTC project cost $218,000, yet only $9,400 of it was the cost of the land; a ratio observably out of whack. This is par for the course for a program which in the past has been scandalized by construction kick-back schemes. The program has been gamed in other ways. Just last Fall, Wells Fargo made an over $2 Billion settlement with the Department of Justice for nation-wide collusion to devalue the tax credits. Hundreds of millions of dollars have been siphoned from the program in these ways resulting in far fewer units being built for the poor at a great cost to taxpayers.
Neither at the state nor federal level, did necessary oversight exist to ferret out inflated budget projections and fraud. In fact, only seven of the 56 agencies around the country awarding these credits has been audited in the program’s 30-year history.
And yet the feds continue to soak increasing dollars into the program each year, though the actual number of units being constructed dwindles. According to an investigation conducted by NPR, the $9 Billion LIHTC program is producing fewer units than it did 20 years ago yet taxpayers are paying 66 percent more in tax credits. Aside from the fraud, another factor likely being the many syndicators, consultants, and financiers that work in their margins into the complicated process.
What else this reveals.
The OGA’s report on the vast cost variations in building state to state, reveal another critically important truth. Jurisdictions with onerous and restrictive land use regulations drive the high costs to build there. These incentive programs in fact reward states that cause their own affordable housing crises and fleece taxpayers all at the same time. A report issued by the National Association of Homebuilders and the National Multifamily Housing Council estimated that 32 percent of multifamily costs were attributable to regulation.
In fact, studies of housing prices have shown costs have directly increased with land use regulations. As a result, federal housing affordability spending is almost two times higher in the most regulated states than the least regulated states.
There are better ways.
It is long-time policymakers address affordable housing for American families by addressing the root of the problem and tailoring assistance programs that serve those in poverty, not only those seeking a profit.
Under the new federal administration, director of Housing and Urban Development (HUD) Ben Carson, has looked to do just that. Instead of continuing to reward bad behavior by local governments, his agency has discussed attaching HUD grants to regulatory reforms proven to lower housing costs. HUD’s position that they won’t continue to aid in the affordable housing problem by subsidizing it – is also a signal to states that they should look to curb their own contributions to the problem instead of simply seeking more federal handouts. In Arizona, one of those factors is the residential rental tax – which disproportionately impacts low-income individuals.
Reforming land regs is a long-term endeavor and won’t solve the immediate need for low-income people in unaffordable housing markets.
But there are better ways to structure programs than the convoluted LIHTC program. One such proposal with bipartisan support are “Housing Choice Vouchers (HCV).” Instead of incentivizing profiteers to supply housing – HCVs empower individuals and families to access housing in places they desire to live.
This approach allows low-income families to move to higher income places which often gives them access to better jobs and school districts and affords children of low-income families’ greater opportunities to succeed. Because the LIHTC programs provide greater incentives for building in designated areas of greater poverty, it has the direct effect of actually concentrating poverty and segregating poor people.
Arizona lawmakers should help poor people and protect taxpayers.
The expansion of this 34-year-old failed federal program in Arizona would be a big mistake. The bill being pedaled this year is not being backed by advocates for the poor; but by those who stand to gain the most – insurance companies, investors and banks. If lawmakers truly care about the poor – and the taxpayer – they will resoundingly reject HB2732.