Main Street or Mean Street?
With the rising cost of housing reaching crisis proportions, state and local investments in affordable housing are multiplying across California. Los Angeles has established what will be the largest municipal trust fund for housing in the nation; plans are to put $100 million annually into rental housing and first-time homeownership for low-income households. And of course, at the state level, Californians stepped up to the plate in November and passed Proposition 46, which will provide more than $2 billion for more than 130,000 units of affordable housing throughout the state.
Unfortunately, the good news ends there.
The Bush administration's proposal to eliminate taxes on corporate dividends could have the unintended side effect of making affordable housing a less attractive investment for corporations.
Since 1986, the low income housing tax credit has given corporations and individuals a bottom-line incentive for investing in low- and moderate-income housing, to the tune of nearly $6 billion of new private capital for housing nationwide each year. It has become the nation's primary means of producing affordable housing and has resulted in more than 1 million new or renovated homes.
The credit works when a corporation or individual invests in a low-income housing project, providing immediate capital to the developer to build. In return, the investor receives a reduction in taxes in proportion to how much was invested. Corporations share the risk and responsibility for keeping the housing well managed and affordable.
Tax credits have been the engine for a public-private partnership that has worked, in good and lean times, in Republican and Democratic administrations, in big cities and small communities alike. The program is administered by the states and has a national reputation for being effective. In California alone, federal and state tax credits have produced more than 110,000 homes, leveraged more than $3 billion in additional public and private investment and created more than 100,000 jobs.
But economists predict that eliminating the tax on dividends could result in corporations switching from tax credit investments that have such a social benefit to tax-free dividends.
The production of affordable housing is complex and includes financing from a number of different sources in addition to the tax credit, including housing trust funds, bonds and redevelopment agencies. Each of these financial components has its own history and provides a key part of any affordable housing project. The new housing trust funds and bond proceeds will go further if they are combined with the low income housing tax credit. In fact, California recently increased its own housing tax credit to further encourage housing development. Losing this investment because of tax-free dividends would mean that California's contribution would produce less.
Some have argued that the proposal to eliminate taxes on dividends is a giveaway to the rich or that it won't stimulate the economy. We would add that the unintended consequence of diminished corporate investment in housing is not so immediately obvious but could have even more serious ramifications. It would take away one of the few advantages available to people who need affordable housing and turn more of our main streets into mean streets.