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Housing in Chicago
In recent years, there has been increasing talk of altering the federal tax system to reduce its complexity. The Taxpayer Advocate Service, a division of the Internal Revenue Service, noted with alarm in 2012 that the tax code is 4 million words long (for comparison, the Bible has less than a million words) and makes filing taxes difficult for almost everyone. During the 2012 election, politicians on both sides of the aisle repeatedly suggested simplifying the system, and last week, the Senate began considering a “blank slate” approach to tax reform that could radically alter current tax policy by eliminating deductions and tax credits. Scaling back special exceptions such as these, proponents of this change suggest, would make the system fairer and reduce standard rates for everyone.
Yet the consequences of a unilateral elimination of tax credits could do significant damage to the cause of rebuilding our cities. Michael Rubinger, chief executive of the Local Initiatives Support Corporation, wrote an op-ed in the New York Times noting that changes in tax policy could eliminate an essential revenue stream: the low income housing tax credit (LIHTC). This credit currently provides billions of dollars for affordable housing and community development projects that serve as an important component of redevelopment strategies in America’s metropolitan areas. In the Chicago region, the Metropolitan Planning Council (MPC) has promoted the use of LIHTC funding to support the construction of homes for families of modest means; losing those dollars would mean far fewer such units built or preserved at a time when many households are seeking them.
Indeed, while the number of families with significant need for housing assistance has increased almost 50 percent since 2007, federal assistance has remained flat. In other words, not enough is being done to guarantee housing support for people who need it most.
LIHTC, created in 1986, is the nation’s largest single financing tool for the construction of new affordable housing, adding 60,000 to 80,000 new affordable apartments a year. Unlike traditional public housing or housing vouchers that are run by public agencies, LIHTC allows state governments to distribute tax credits to qualified developers building new or rehabilitated housing. These credits are contingent on 30-year affordability guarantees that commit to maintaining unit rents affordable to low-income families. Nationally, more than 500,000 units are covered by LIHTC—more than traditional public housing—and at least 26,162 units are covered by the program in Cook County.
Keeping LIHTC around would not even be particularly costly to the American taxpayer. Compared to the mortgage interest tax deduction, used by most homeowners and benefiting a much wealthier group of individuals, LIHTC is about one-sixteenth as costly. Today, the federal government spends about $60 billion annually supporting low- and moderate-income renters (including LIHTC and other programs like Section 8), and it directs far more tax revenue—almost $190 billion—subsidizing homeownership. All together, federal housing programs overwhelmingly support the wealthy; the average household with an income of $200,000 or more receives a subsidy of $7,000 a year, whereas the average household with an income of $20,000 or less receives an annual subsidy of less than $2,000. It’s a grossly inequitable system.
That’s why maintaining federal housing programs specifically aimed toward low-income households, including LIHTC, is so important.
The program is not without its design flaws. It is true that LIHTC has not been as effective as other federal programs in maintaining affordability for those with the lowest incomes. The program’s administration, which relies on complex interactions between investors, private developers, housing agencies, attorneys and lenders, results in major inefficiencies. For example, a 1997 Government Accountability Office study found that up to 27 percent of equity invested in LIHTC projects was diverted to syndication costs. Reforming the program so that each credit is used more judiciously would benefit federal taxpayers.
Moreover, LIHTC are not designed to reach the poorest of the poor. Both the public housing and housing choice voucher programs, for example, reserve more than 75 percent of their units for families with incomes at or below 30 percent of the area median income (which is $73,600 in the Chicago region for a four-member household). The equivalent statistic for LIHTC units is 45 percent nationwide—a figure that includes units that are cross-subsidized with federal vouchers. That said, LIHTC plays an important role in supporting households with incomes of between 30 and 50 percent of area median income, a large group of families who are usually unable to qualify for voucher or public housing programs but also not wealthy enough to own their own homes and would likely otherwise be rent-burdened.
Though there are other sources of funding for affordable home construction, such as Chicago’s own low-income housing trust fund, federal LIHTC support is the largest single contributor and any decrease in funding would have serious implications. Unless the federal government dedicates a new source of funding to new affordable housing construction, it would be rash to eliminate this important federal commitment.