Utah’s population is the nation’s fastest-growing. The state faces critical shortages of both affordable and market-rate housing and its capital city is confronting a crisis over homelessness.
Against that backdrop, a House-passed tax reform bill and a second one in the Senate would, in varying degrees, gut decades-old tax incentives that promote affordable housing development, neighborhood revitalization and adaptive reuse of historic buildings.
At immediate risk in Salt Lake City alone, in the worst of the scenarios, are 650 units of affordable housing expected to be developed through 2019. Statewide, the 5,000 affordable units developed in the last three years, and the $800 million and 14,000 jobs derived from that development, could slow by half going forward.
And this may come at a time when the state needs more in the “all of the above” category.
“We are in a housing crisis now, and we still have all of the tax credits,” said Melissa Jensen, director of Housing & Neighborhood Development for Salt Lake City. Mayor Jackie Biskupski’s administration is working with community advocates and federal representatives to lobby for keeping the incentives.
“The scope of the impact is huge, because we already don’t have enough,” Jensen said.
The housing-related provisions have attracted little attention amid the larger debate over whether the tax cuts will favor the rich or provide relief to middle-class families.
Utahns in Congress — all Republicans — have backed the GOP tax bills saying they are a boon for “hardworking” residents. They haven’t mentioned the possible undercutting of affordable-housing incentives.
The credits at risk
The House GOP tax plan approved along party lines Thursday calls for the repeal of private activity bonds, a type of tax-exempt government financing that includes borrowing for multi-family housing. Those bonds work in conjunction with a 4 percent tax credit provided under the federal low-income housing tax credit (LIHTC) program, an incentive created in 1986 during the administration of President Ronald Reagan.
Without the credits, affordable housing projects struggle to generate enough rent to justify investment. Nationwide more than 1 million affordable homes have been financed under the program, 38,000 in 2015 alone, according to the National Council of State Housing Agencies.
While the House tax bill retains the LIHTC tax credits, the repeal of private activity bonds effectively eliminates the 4 percent credit that can be used with them. Novogradac & Co., a national accounting firm, estimates the repeal would mean 881,000 fewer affordable rentals homes created over the next decade, or more.
Senate plan less disruptive
The House GOP’s move to eliminate private activity bonds is designed to raise some $39 billion over the next decade to help pay for lower corporate and individual tax rates. The Senate tax bill keeps the private activity financing but, like the House bill, proposes cutting the top corporate tax rate from 35 percent to 20 percent.
That rate cut, a central component of the Republican plan, would change the incentives for some investors, making it less advantageous to seek the tax-exempt financing for multi-family housing. It has been a way to offset their tax liability under the existing 35 percent rate.
Novogradac estimates a $1.8 billion loss of equity available to affordable-housing developers over 10 years, with a resulting 300,000 fewer affordable homes built. With it comes the loss of 331,000 future jobs, $28 billion in future business income, and $10.7 billion in foregone federal, state and local tax revenue.
Utah’s share of those reductions, under the worst-case scenario, could amount to more than 2,300 homes, 2,600 jobs, $221 million in business investment and $85 million in tax revenue, according to the accounting firm and the National Association of Home Builders. Recent history lends weight to those projections.
Claudia O’Grady, vice president of multifamily finance at the Utah Housing Corp., which administers the tax credit program in the state, said approximately 5,000 affordable rental units have been created statewide in the past three years under the LIHTC program. That includes 1,300 in Salt Lake City and 2,600 elsewhere in Salt Lake County. Overall, development and construction generated $800 million in economic activity and 14,000 jobs during the period, she said.
“This is not a handout-type program,” O’Grady said. “At marginal expense to the federal government, these tax-incentive programs not only create affordable housing but catalyze economic activity. Those are two things that Utah can’t afford to give up.”
Jensen, the housing and neighborhood development director for Salt Lake City, said the 650 affordable units now in the 12-24 month pipeline as part of larger mixed developments could be halved. The impact of losing the LIHTC credit would be felt on all housing development, not just affordable housing, not to mention on initiatives to address homelessness, and on private developers who rely on the tax credits to make their projects financially feasible.
“It would be devastating,” she said.
Developer Dan Lofgren, CEO of Cowboy Partners, said losing the incentives would be a “huge setback to the efforts to mitigate the housing affordability crisis.” His firm has developed projects using both types of low-income housing incentives, and one is currently in the planning stages in downtown Salt Lake City at 300 East and 200 South.
The site includes the former Pacific Northwest Pipeline headquarters, which later served as the city’s public safety building. The housing component of the development calls for 248 residential units, including 28 affordable units and 65 permanent supportive housing units for the chronically homeless.
“In Salt Lake City right now, there are hundreds and maybe more than 1,000 housing units that have some affordability attached to them as a result of that program,” Lofgren said. “It’s a compounding thing as communities, particularly large cities, deal with what gets described as an affordability crisis, if one of the most effective tools gets taken away.”
Historic tax credit also threatened
The so-called Northwest Pipeline development in the capital’s downtown relies on a second tax break that is threatened under both the House and Senate tax bills: the 20 percent federal Historic tax credit (HTC) enacted in 1981 to encourage preservation and reuse of certified historic buildings. The House bill would eliminate it while the Senate version would cut the credit to 10 percent. For the Northwest Pipeline project, the credit would be applied to renovating the former police headquarters. The 1958 building is on the National Register of Historic Places.
Since its inception, according to an economic impact analysis done for the National Park Service by Rutgers University, the federal program has generated $131 billion in private investment for the rehabilitation of 42,293 historic buildings.
In Utah, a 2013 study commissioned by Preservation Utah showed the program had delivered $35 million in credits against $177 million in private investment since 1990.
“As a preservation entity, we have no financial gain from this (tax credit) being saved, but why we feel it’s so important is because since it was established in 1981 it has been the single most effective financial incentive to historical preservation across the country,” said Kirk Huffaker, Preservation Utah’s executive director.
The properties involved often “are in such deteriorated condition that you need a package of incentives” to make renovating them financially worthwhile, he said.
A third tax incentive that promotes investment in low-income communities is also at risk. The New Markets Tax Credit, established in 2000, has issued $20 billion in credits to support 4,800 projects throughout the nation.
In Utah between 2003 and 2015, 62 businesses and revitalization projects received nearly $309 million in those credits under the program, creating 7,900 jobs.
The House tax bill would eliminate this incentive, while the Senate bill would preserve it.