By Tom Hoban Realty Markets
It seems the rich-should-pay-their-fair-share proponents are getting lots of attention these days as economic malaise continues into a new year.
Ending what some refer to as “corporate welfare” sounds good. But most tax breaks are designed to create incentives to people and corporations with taxable income to do things in the public interest. Some are pork and need attention. When tinkering with tax breaks, though, one needs to be very discerning or a baby might be thrown out with the bath water.
A great deal of low-income and affordable apartment housing built in the past 20 years would not be were it not for an IRS code that allocates tax credits to profitable corporations in exchange for building apartments laid with restrictions on how much they can charge for rent.
Commonly referred to as the tax credit program, the developer-owner who receives the tax credits must serve families and individuals considered poor or vulnerable — usually those earning less than 60 percent of the median household income in the county where the housing is built. It’s been a remarkably efficient way to deliver affordable housing to millions of Americans and has all but replaced the failed public tenement housing model of the 1960s and 1970s that put the government directly into the housing and construction business, leaving cities with blocks of highly concentrated areas of urban blight.
The tax credit’s simplicity and efficiency is what makes it work so well: The federal government budgets a certain dollar amount of tax credits and distributes them to the states based on their population. The states then push the tax credits out through an organized system that measures numerous factors. Developers and housing providers compete for the tax credits. They, in turn, usually sell the tax credits at a discount to profitable corporations and use the cash they raise to build.
Odds are you drive by one of these apartment complexes in your daily travels and probably have no idea it is low-income housing. Anyone is eligible to rent a unit so long as they can verify their income under the thresholds. No government red tape, no long waiting period for the individuals and families of modest or low income.
But little of this affordable product is being built right now because the market for tax credits dried up when the recession hit corporate bottom lines. Banks were major purchasers of tax credits, for example. Few are profitable today. Corporations that are profitable seem to be holding onto their cash until they can gauge the impact of the European debt crisis and the 2012 political election cycle in the U.S.
Thoughtful examination of every tax break delivered to corporations often spins out similarly. The best forms of tax incentives are geared to attract entrepreneurs and corporations to locate in your community and stay so that the jobs they create benefit your citizens. Communities that do this tend to see higher employment.
Tinkering too much with corporate tax credits and incentives is delicate business and fraught with unintended consequences if not done thoughtfully.
Thousands of people living in affordable housing in our region are depending on those in leadership positions to pay attention to the relationship between corporate profits and affordable housing under a program that has been working effectively for almost two decades. Let’s hope they keep that in mind.
Tom Hoban is co-owner of Everett-based Coast group of commercial real estate companies. Contact him at email@example.com or 425-339-3638.