Tuesday, May 5, 2009

Housing Tax Credits [Group 4]

Minnesota Housing, in collaboration with other state agencies, other units of government, and private stakeholders developed Heading Home 2010 (the Plan). The Plan calls for the creation of 4,000 housing opportunities (both physical developments and rental subsidies/vouchers) targeted to those experiencing long-term homelessness (as defined by the state).

At its outset, the $483 million Plan included $60 million in Housing Tax Credits (HTCs). Under Section 42 of the Internal Revenue Code, HTCs provide a dollar-for-dollar reduction in tax liability for project investors. Credits also provide an equity investment for development, pulling down the rents required to achieve acceptable net operating income.

States currently receive credits worth $2.20 per capita (adjusted annually for inflation). Approximately 60% of the credits available to Minnesota are allocated by Minnesota Housing. The remainder are distributed by local government suballocators. HTCs have remained a mainstay of Minnesota affordable housing finance since their inception in the late 1980s but are not without shortcomings.

The market for tax credits is pro-cyclical—development of tax credit-financed projects drops as unemployment and foreclosure rates increase. This problem is particularly acute in non-major markets and in supportive housing developments. Some provisions of the American Recovery and Reinvestment Act of 2009 seek to temporarily stabilize the HTC market. Among them is the tax credit exchange program, in which tax credit allocators may sell unused 2008 and 2009 credits back to the Treasury for 85 cents on the dollar. This policy is expected to yield a windfall for “shovel-ready” projects.

Additionally, HTCs are inherently designed to finance moderate income housing, not the very-low housing as called for in the Plan. Only 30% of persons experiencing long-term homelessness are employed—only 12% full-time. Affordability to the lowest earners is a key barrier to housing.

Because of these structural weaknesses, additional financing is required in order to make housing financially sustainable and affordable to very low earners. In Minnesota, the state-appropriated Housing Trust Fund helps cover capital costs, but is vulnerable to budget reductions in tight economic times.

Other states have taken different strategies in combating long-term homelessness. Wisconsin funds five state programs to this end. In contrast to Minnesota, the Wisconsin programs all give direct payments to individuals. However, the Wisconsin programs seem skewed toward middle-income target populations, as they emphasize stable home-ownership.

King County, Washington has convened the Committee to End Homelessness, an effort very similar to Minnesota’s plan. Noting that long-term homeless populations tend to consume other social services at high rates, the Committee hopes to capture cost savings across all services by stably housing people. These cost savings realized through cross-system and cross-sector coordination finance the county’s housing efforts. [see chart below from CEHKC]

Clearly, long-term homelessness is causally complex and cannot be solved by HTCs alone. Minnesota should strengthen its Housing Trust Fund—the flexibility provided by this financing source is well-matched to the needs of the population and could help to fill systemic resource gaps. Additionally, Minnesota should continue exploring cross-sector, networked approaches to housing and social services.

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