By Lowell L. Kalapa
(Released on 9/7/08)
In the past few weeks we have focused our attention on affordable housing and how it can be achieved in Hawaii where housing prices are stratospheric and in doing so have cited the federal and state low-income housing tax credits as some of the tools available to lawmakers and housing administrators.
Some readers wrote in asking if the Foundation had switched its position on tax credits as this commentary had alluded to credits as part of the mix of tools available to create affordable housing. No, not necessarily on tax credits that lack accountability and can be claimed without limit. Perhaps the federal low-income housing tax credits should be the standard in how to construct a tax incentive that truly achieves its stated goals and for which taxpayers can determine its effectiveness.
Unlike some of the state tax credits for things like high technology, digital media productions, ethanol production plants, and renewable energy devices, the federal low-income housing tax credit is highly regulated and is reviewed and approved by the state or local housing finance development agency. In the case of the 9% tax credits available under the federal law, the amount each state gets is determined by the population of that state times a per person amount. In the case of smaller state, there is a minimum floor of $2.5 million that has recently been increased by the measure approved by Congress earlier this summer. Because these tax credits are capped by federal legislation, the amount available for the state tax credit is also capped.
While the more recently enacted state tax credits come with a cap on the amount that may be claimed, generally there is no taxpayer specific limits or limits in the aggregate. Thus, the sky is the limit as to the number of claims that can be made and the dollar amounts that can be claimed.
Because the 4% low-income housing tax credits are not as attractive as the 9% tax credits, there is no cap, but the amount allocated each year is subject to review and approval by the state or local housing finance development agency. Both credits are based on the amount of qualified costs incurred in the construction or renovation of affordable housing. What qualifies as eligible costs is precisely defined by the federal law and is monitored closely by the local housing finance development agency as well as by the Internal Revenue Service. It should also be noted that General Services Administration has regularly audited the federal program and because it is so transparent, it has garnered support from both sides of the aisle in Congress, which incidentally sweetened the provisions of the program.
Currently what is working to the disadvantage of the state and federal low-income housing tax credits is the fact that the credits must be claimed over a period of ten years whereas many of the other state credits can be claimed in the next year after the qualifying investment or expense has been made or in some cases are claimed over a shorter period of five years.
While some of the state tax credits are equal to only a portion of the qualified costs incurred, there are others that provide the investor with a 100% return on the amount invested. In the latter case, it is a waste of taxpayer dollars because the 100% credits don’t leverage other sources of funding. Credits which are good for only a portion of the project insure that the developers find other sources of financing. By using the tax credit mechanism to attract other investors ensures the developer can access other sources of capital.
Finally, with the federal low-income housing tax credit program, the law requires the investor to comply with the parameters of the program by insuring that all of the units for which the credit is claimed remain affordable for a minimum of 15 years with the possibility of another 15-year extension. Any violation of compliance with the affordability requirement triggers recapture of the credits that were already claimed.
Not only have the unlimited state tax credits for activities like high technology and digital media production been wildly more generous, they have detracted from the low-income housing tax credits because they are not as generous nor can they be claimed immediately. The low-income housing tax credits benefit everyone in the community by adding to the inventory of housing that Hawaii’s residents so desperately need while the widespread benefit to the community is not as obvious with the other state tax credits.
When was the last time you heard someone say they didn’t need a roof over their head?