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LIHTC and the Corporate Tax Rate
Under the current regime, higher corporate taxes means more affordable housing
A few months ago I wrote a piece reviewing pieces of the Biden housing plan for the People’s Policy Project blog. I briefly reviewed how the US corporate tax rate is tied to the efficiency of affordable housing production. Namely, when the rate goes up, production goes up. Many people commented on this being interesting or perhaps unintuitive, so I thought I would go a bit more in depth.
For my thesis statement, I will choose “as a matter of policy, tying the productiveness of affordable housing construction subsidies to the corporate tax rate is bad”.
Background on LIHTC and the corporate tax rate
As LIHTC (Low-Income Housing Tax Credit) is today’s dominant player (and momentum toward any significant overhaul of the program is limited) it is important to consider policies that impact its effectiveness—that is, ability to produce new units of housing. One important factor that impacts LIHTC’s effectiveness is, curiously, the corporate tax rate. The lower the corporate tax rate, the fewer units the LIHTC will produce, and the higher the tax rate, the more units. I presume some might argue there is a Laffer-esque curve to this impact, but it’s highly unlikely we would reach an inflection point inside our Overton window.
In the world of affordable housing, this was widely noted when the Trump Tax Cuts and Jobs Act of 2017 cut the corporate rate fourteen points, from 35% to 21%, resulting in an estimated 14% reduction in the productiveness (number of units produced) of the LIHTC.
It’s helpful to understand how the corporate tax rate actually impacts the productiveness of these tax credits. It plays out in the syndication arena of affordable housing dealmaking, where large tax-entities (mostly banks, private hospitals, and institutional investors like pension funds) purchase the tax credits from affordable housing developers. When a bank buys some LIHTCs, they get to claim that those credits on their taxes every year for ten years (assuming the development itself does not fail to meet its affordability and other operating requirements).
In its idealized form, the program allows investors to simply offset, 1-for-1, their tax liability with their equity investment in the project. However, due to the fact that these tax credits are exchanged on the market, investors are able to basically lowball affordable housing developers—usually purchasing tax credits for $0.85 to $0.95 on the $1 face value of the credits. The higher the corporate tax rate, the more banks are willing to pay to reduce their tax liability—and the more affordable units get built.
Making some estimates
To do some napkin math, we can use this Novogradac analysis to make some estimates of how many affordable housing units will (or will not) be produced with a 1% increase (or decrease) in the corporate tax rate, per year. Running the numbers, you get just over 1,600 units per year, per percent change. While this isn’t much on its own, we know that the corporate tax rate changes by more than one percent when it does change, and the yields on affordable housing production at the macro level are typically measured over ten-year periods.
We also know that most estimates peg the number of affordable housing units needed at about seven million, so what is shown here is the total number of years it would take to produce that number of units based on the corporate tax rate.
Unfortunately, it looks a little depressing. Pumping the corporate tax rate up to around 50% would get us to our production goal by around 2070. Of course, if the corporate tax were increased to 50% tomorrow, we can hope that some of those new revenues would be used for other programs that would have poverty mitigation impacts, such as reduction in housing cost burden, thereby reducing the number of units we would need to produce—but those are estimates for another day.
What if we doubled the allocation?
Astute readers might also be wondering what would happen if we doubled the allocation of these scarce tax credits? First, for accuracy’s sake, we would have to account for the fact that doubling the supply of these items would likely see at least some price reduction, so I’ve baked in a very generous 50% reduction in the unit production per year per percent change in the corporate tax rate.
The result is still pretty dismal—at the best, we’d be looking at about 2050.
Clearly there are limitations to the LIHTC, and the levers available for policymakers to pull do not have the production impacts we need to get out of this mess anytime soon. In the near future, I plan to discuss some alternative means of financing subsidized housing development, and extolling the benefits of economies of scale that current implementations of subsidized housing production has failed to achieve.
In the near term, though, Joe Biden should raise the corporate tax rate not to the 28% he has proposed, but to the 50% level, or higher—not only would it results in hundreds of thousands more units over ten years, it would also obviously have other great impacts for inequality in general.