The Supply-Side Tax Credit: A National Incentive to Reduce the Cost of Affordable Housing
Because affordable developers pay the same price for goods and services as market rate developers, the cost to build affordable housing continues to increase with market conditions, stunting projects and states’ attempt to meet their Regional Housing Needs Assessment goals. One way to address the cost of development is to incentivize manufacturers and consultants to reduce their upfront cost when working on, or supplying materials for, an affordable development. A supply-side tax credit (STC) could offer a tax incentive to material suppliers and professional service consultants that provide goods or services to affordable housing projects.
If consultants and manufacturers are willing to reduce their upfront cost in exchange for a dollar-for-dollar tax credit, the cost of developing affordable projects would significantly decrease. Since the amount of tax credits required for a project to be financially feasible is determined by the cost of construction, also referred to as eligible basis, the reduction in hard and soft costs realized through the STC would reduce the amount of low-income housing tax credits needed for each project. This would increase the number of projects that could receive a low-income housing tax credit allocation annually.
Allowing suppliers of affordable housing to claim a tax credit in their annual tax filings would reduce their corporate or individual tax liability, thereby immediately passing savings through to the affordable developer. The table applies a 30% Supply-Side Tax Credit to hard and soft costs of a recent project. In this scenario, the affordable developer will see $4.44 million in project savings.
When the affordable developer requests bids for services or construction of the project, notice will be provided in the Request for Proposals/Qualifications that if the manufacturer or consultant reduces their cost by 30%, they will receive a Supply Side Tax Credit Reservation when the project is awarded either 4% or 9% Low-Income Housing Tax Credits (LIHTC). The reservation of the LIHTC will simultaneously secure the manufacturer and consultant’s STC until the following tax period.
The STC differs from the LIHTC in that it is not an equity investment in the project but rather a tax incentive for suppliers of affordable housing. The STC also differs in that LIHTCs are earned over a 15-year period, and the STC is earned in the tax year the tax credit reservation is made. This timing allows suppliers to realize the tax benefits as soon as possible since a large portion of consultant costs are incurred well before a tax credit allocation. Because this is a new tax credit, it will be independent of the federal per capita-based LIHTC credit cap. The STC will also reduce the amount of LIHTC credits needed to make a project feasible through a reduction in overall costs. Therefore, implementation of STC would increase the number of projects LIHTC could fund. Administration of this tax credit would fall under the state agency that currently administers the LIHTC program.
Because the STC reduces corporate or individual tax liability, efficacy of the program may be reduced should the allocation of credits exceed a manufacturer’s or consultant’s tax liability. Therefore, the reduction in tax liability may be structured as a 30% reduction, rather than a dollar-for-dollar reduction in tax liability.
State-level support for a Supply-Side Tax Credit may be found in advocacy organizations in the affordable housing arena, like the Non-Profit Housing Association of Northern California, California Housing Partnership, East Bay Housing Associations, California Coalition for Rural Housing, and others. This proposal could be made to the California State Treasurer’s Office, which administers both the 4% and 9% tax credit programs.
Federal support may be found in federal advocacy organizations like the Grounded Solutions Network, the National Housing Conference, and the National Association of Housing and Redevelopment. Political support may be found in the Senate Finance Committee, which proposed the Workforce Housing Tax Credit Act, also known as the Middle-Income Housing Tax Credit, to both houses of Congress to build more middle-income housing.
With the assistance of Congress in drafting and proposing the Supply Side Tax Credit to the Senate Finance Committee and working with the California Tax Credit Allocation Committee and the California Debt Limit Allocation Committee to draft and issue program guidelines for the administration of the credit, we may get closer to solving this crisis. To draft the legislation itself could cost an estimated $150,000 in legal and financial advisor fees and $25,000 for lobbying and advertisement. This $175,000 cost can be raised through a capital campaign to organizations like Enterprise Community Partners that works with nonprofits to push policy change, along with support from the California Community Foundation that provides grants for long-term systematic solutions to the housing crisis in Los Angeles, as well as the grants from the San Francisco Foundation, and the Local Initiative Support Corporation. All of these organizations have the capacity to grant such an award and interest in making affordable housing less costly. This $175,000 cost would be reimbursed on the first deal that utilizes the STC. Additionally, money would naturally be saved long-term by reducing the upfront cost to build and by freeing up additional Low Income Housing Tax Credits due to the reduced cost and thus reduced tax credits needed on each Supply-Side Tax Credit deal.
The STC offers a new way to help control the rising cost of building the affordable housing this nation desperately needs.
This idea of merit originated from our Housing Ideas Challenge, in partnership with Learning Collider, National Zoning Atlas, and Cornell’s Legal Constructs Lab. Find additional ideas to address the housing shortage here.
A supply-side tax credit (STC) could offer a tax incentive to material suppliers and professional service consultants that provide goods or services to affordable housing projects.
The Department of Housing and Urban Development (HUD), Department of Commerce, and Department of Transportation should jointly develop and manage a data resource—a Housing Production Dashboard—to track housing production within and across states.
Exempting affordable housing from volume caps would address the underlying issue and have the greatest impact in this housing emergency.
The U.S. should establish a national housing loss rate to stand alongside the national unemployment rate as a key indicator of social and economic well-being.