A provision buried in the House version of the Republican tax bill could decimate affordable-housing construction in New York City, by eliminating tax-free bonds and tax credits that are used by the vast majority of subsidized housing projects in the city.
If the language survives in the compromise version produced by the House-Senate conference committee, says Ted Chandler, chief operating officer of the AFL-CIO Housing Investment Trust, “85 percent of affordable-housing production in New York City would stop.”
As a 1998 federal law, the Quality Housing and Work Responsibility Act, generally prohibits cities from using federal funds to build more public housing, cities seeking to create or renovate more affordable units largely depend on leveraging private investment. To do so, they offer two carrots to developers. First are tax-exempt “private activity bonds,” which are used to finance private enterprises considered to have a public benefit, and which allow builders to fund projects at lower interest rates than taxable bonds would carry.
In addition, private activity bonds currently unlock federal low-income housing tax credits (LIHTC), which for-profit developers can use to save money on their taxes, and nonprofits can sell to other, taxable entities in exchange for cash. If more than half the money in a private activity bond is going to low-income housing (defined as offering units to families making 60 percent or less of “area median income,” about $51,540 a year for a family of three in the New York area; because that figure is calculated including Westchester, Putnam, and Rockland counties, as many as half of the city’s households may qualify as “low-income”), the developer is automatically eligible for a 4 percent tax credit. Selling those credits can pay for roughly 40 percent of the project’s total cost over a ten-year period.
New York City and New York State are “the two largest issuers of private activity bonds in the country,” says former state housing commissioner Deborah VanAmerongen. Mayor Bill de Blasio’s housing plan, she explains, relies on mixing public funds with the bonds and low-income housing tax credits. The public funds, the mayor’s office has previously indicated, are used to subsidize rents for poorer tenants, via such programs as Extremely Low & Low-Income Affordability (ELLA). The New York Housing Conference, a policy and advocacy group for the affordable-housing industry, says eliminating the tax exemption for private activity bonds would cost the city $1.5 billion in loans and $1.1 billion in tax credits, enough to build about 5,800 apartments per year. If the credits were eliminated, says Chandler, that would mean a $50 million development could lose $20 million in equity.
New York City Housing Development Corporation head Eric Enderlin told a New York Housing Conference panel discussion on December 6 that other sources of loans are available, but “there’s no way we’ll do it as efficiently.” There would be no way to replace the money lost from the tax credits, he added.
“If any source of funding is taken off the table,” says VanAmerongen, “the city would have to spend much, much more to get that building built.” Without the tax exemptions, she explains, private lenders would be unwilling to make loans for affordable housing, because the rent revenues simply wouldn’t be high enough to ensure they’ll be repaid. The maximum rent for a two-bedroom apartment in a qualifying building is $1,166 a month.
Speaking to the Voice after the December 6 panel discussion, Chandler described these buildings’ financing structure as “like a Jenga tower. If you pull that equity out of the tower —”
“It falls down,” interjected Peter Lawrence of the Washington office of accounting firm Novogradac & Company, thumping his hand on the table to signify collapse.
“The reality is that housing, not taxes, is the number one expense for American families, and that is true whether you are in New York City or Des Moines,” mayoral spokesperson Melissa Grace told the Voice. “The proposal to eliminate private activity bonds and drop the corporate tax rate would mean the loss of funding to build thousands of affordable homes for low- and middle-income New Yorkers.”
Even if the final version of the tax bill preserves the exemption for private activity bonds, as the Senate version currently would, its massive corporate tax cuts — reducing the corporate tax rate from 35 percent to 20 percent — would still indirectly slash city housing funds. If corporations’ tax obligations are significantly lower, they’ll have less reason to buy tax credits, explains VanAmerongen.
The mayor’s office estimates the losses in tax credit sales thanks to the corporate rate cut would cost the city’s housing programs about $200 million a year, including about $30 million for the less commonly used 9 percent LIHTC. That credit, explains VanAmerongen, is “much more valuable,” because it can cover up to 70 percent of development costs; however, she says, it’s only awarded once a year by the city and state, typically to about ten developments of forty to fifty units in the city and thirty in the rest of the state.
Several provisions in the Senate version of the bill would also reduce funding for housing. An amendment sponsored by Republican senator Pat Roberts, of Kansas, would eliminate the low-income tax credit for artist housing and replace it with one for veterans — and as written, would be retroactive, so local governments would have to reimburse the federal government for tax benefits they’ve already spent. The retroactivity may have been a last-minute drafting error, Peter Lawrence told the panel discussion — or at least, “we hope it is.”
The Senate version would also reduce the “basis boost,” which allows local governments to increase the amount of a project’s costs used to calculate tax credits by 30 percent in situations deemed “difficult to develop,” such as rural areas, places with high construction costs, and projects that include supportive housing. The current version would lower that to 25 percent. Another provision would tighten regulations on investments by foreign-owned banks, which Beth Mullen, an affordable-housing specialist at the Sacramento, California, investment firm CohnReznick, estimates would reduce the amount of equity such banks provide by 10 to 15 percent.
The choice between the House and Senate versions of the bill, Ted Chandler told the panel discussion, is between a “slow, painful death” and “complete and utter obliteration.” Either, he says, would be “an attack on federal support for housing,” estimating that they would cut direct and indirect support by half, from $200 billion a year to $100 billion.
Why did the House Republicans want to eliminate private activity bonds? Some people on the New York Housing Conference panel said they’d heard it was because of the bonds being used to finance corporate headquarters and golf courses, and that some GOP members felt that tax-exempt bonds plus tax credits were “double-dipping.” They might also have been looking for any program they could cut to offset the trillion-dollar deficit increase caused by their tax cuts for the rich. Others have speculated that because the bonds have been used to finance stadiums, opponents have been stimulated by the backlash against football players kneeling during the national anthem. Or it could be the far right’s well-known antipathy to people relying on government aid, who they view as useless eaters lacking personal responsibility.
Ways and Means Committee chair Kevin Brady, Republican of Texas, the sponsor of the House version of the tax bill and the chair of the conference committee, did not respond to multiple requests for comment from the Voice. A committee spokesperson told the Washington Post in November that the tax bill would “deliver greater accountability to taxpayers by removing this special status for private activity bonds, which directly benefit private individuals and entities.”
New York Housing Conference executive director Rachel Fee told the Voice on December 8 that the group had heard support for preserving the exemption has grown in the House, “so we are feeling more confident that private activity bonds will be included in the final bill.”
The 29-member conference committee will have a 17-12 Republican majority. No members are from New York State, and only Senator Robert Menendez, Democrat of New Jersey, is from the New York City metropolitan area. Republican senator Rob Portman of Ohio told the Wall Street Journal on December 7 that the committee could finish its work by Friday, December 15. The Republicans hope to push the final tax bill through before the Christmas recess.