http://archive.nytimes.com/2003/03/19/nyregion/19BUIL.html
Tax-Cut Plan May Endanger New Housing By DAVID W. CHEN Virtually all the rental units for low-income residents that have been built in the last 15 years in the United States have been financed in part by a little-known provision in the nation's tax code: credits given to private corporations for investing in housing for the poor. For years, corporations, eager to limit their tax exposure and thus keep their revenues high and shareholders happy, have bought the tax credits at a slight discount, and thus, as a kind of enforced side effect, helped to finance the construction of the kind of unglamorous housing that otherwise might not be built. The financing tool, long known as the low-income housing tax credit, has been so effective that it was one of the strategic ideas at the heart of Mayor Michael R. Bloomberg's new $3 billion five-year plan to build and renovate more housing than has been built in almost a generation. But in recent weeks, city officials, housing experts and others have come to realize that Mr. Bloomberg may no longer be able to count on all those instrumental corporate tax dollars. President Bush's tax cut plan, with all of its much-debated breaks for private industry, could all but eliminate the incentive for most corporations to buy the tax credits. Corporations, the officials and experts believe, may simply have more attractive options under the plan for how to maximize and protect their money. "We're certainly not willing at this stage to declare a catastrophe or anything," said Jerilyn Perine, commissioner of the city's Department of Housing Preservation and Development. "But there's no question that our plan presumes that these tools are available to us. It's something we're concerned about." The concern stems from the fact that without those tax credits, and the corporate dollars they produce, the city, which is now staring at $4 billion budget hole, would not have enough money to carry out the mayor's ambitious housing agenda. Adam Weinstein, president and chief executive of the Phipps House Group, one of the city's largest nonprofit housing developers, was blunt in linking Mr. Bush's proposed tax cuts to the mayor's vision. "So much of the Bloomberg plan depends upon having the credit that the loss of the credit really takes the heart out of the program," said Mr. Weinstein, whose company has used the corporate money to develop or rehabilitate 1,500 low-income housing units in the city. "It guts the program." In simplest terms, the low-income housing tax credit works like this: Each year, every state receives tax credits from the federal government as a way to stimulate housing construction. The state allocates the credits to specific projects proposed by competing developers � anything from a two- or three-story building with six units on Eldert Street in Brooklyn's Bushwick neighborhood to a six-story building on Riverside Drive in Harlem. Those developers, who work with community groups, sell the credits to companies, whose cash they use to start the projects. Since its inception in 1986, the tax credit has generated about $6 billion in private investments to build a million units, or virtually all the low-income rental housing put up across the country. The figure also equals 40 percent of all the apartments, including luxury units, according to the National Council of State Housing Agencies. But the Bush tax cut plan may remove the rationale for companies to use this tax maneuver. The president's plan, after all, calls for the elimination of taxes on dividends, which would be a huge boon to corporations and their shareholders, and, experts and others say, relieve corporations from any longer having to come up with creative ways to limit tax liability. Corporations would then feel liberated by the plan to use the earnings they might have otherwise sheltered in housing credits to pay their shareholders tax-free dividends or reinvest them tax-free. "By making other investments more attractive, tax credits become less attractive," said Prof. Michael H. Schill, director of the Furman Center for Real Estate and Urban Policy at New York University. Put another way, Professor Schill said, Mr. Bush could make the housing credit so unappealing that even corporations interested in housing would likely offer far less money for the credits, thereby diminishing the capacity of the developers to get as much done. "Despite what they say in terms of public relations, corporations invest in low-income housing tax credits not because of altruism but primarily because that is one of the few ways their share owners can avoid double taxation," he said. The dividend tax proposal would also likely affect tax-free bonds, another important tool in the low-income housing world. If the new dividend tax proposal becomes law, tax-free bonds would suddenly be competing with tax-free dividends for investors' capital. And since those bonds traditionally have a lower yield than stocks, their attractiveness would decrease, making it harder and more costly for developers to produce as much housing. The Bush tax plan is not yet law, and it has provoked fierce opposition. Thus many lawmakers say it is likely to undergo considerable revision. But for many, much seems at potential risk. A recent analysis conducted by Ernst & Young for the National Council of State Housing Agencies estimated that if the Bush plan became law, apartment production would drop by 35 percent and 40,000 fewer units would be built each year, with the biggest impact felt disproportionately in "low-income neighborhoods, isolated rural areas and high-cost urban areas." "To do anything that has an inkling of potentially damaging something that we know is a solid program that works would be mismanagement," said Alan Hirmes, senior managing director of the Related Capital Company in New York, which sells the credits to companies. In New York, the issue of housing for poor and middle-income residents is receiving more attention than it has since the Koch administration. In December, Mr. Bloomberg proposed that the city build or renovate 65,500 units over the next five years, and build an additional 7,000 units on city-owned land, using cash generated by the housing tax credit, existing capital funds, tax-exempt bonds and other sources. A budget and policy analyst for the city's Independent Budget Office, Molly Wasow Park, said that the mayor did an impressive job in stretching the city's limited resources to come up with the plan, and even accounted for deep cuts to the city's capital budget. But because of the potential ramifications of the tax plan, she said, "it's all based on a foundation that's changing." Virtually everything in the plan could be affected, especially the $200 million in private capital that the city had expected the housing credits to generate, as well as hundreds of millions of dollars from the sale of bonds. In 2002, New York City used roughly $25 million in housing tax credits to attract $200 million in investments to help build an estimated 2,000 low-income units in 100 housing developments, city officials estimated. Over all, since 1988, the city has used roughly $250 million in credits to generate about $1.6 billion in investments to subsidize the production of an estimated 30,000 low-income units for families who make, on average, $23,864 a year, according to city housing officials. But if the Bush administration's tax cut package passes, the city might be able "to do a couple thousand units a year, maybe, but that's all," said Denise Scott, managing director of the New York office of Local Initiatives Support Corporation, which helps to administer the financing of the projects. "I don't see that the mayor's plan is possible." A few housing experts, including Professor Schill, believe that the mayor's plan would still be viable, if a bit more modest, without the credit. Still, many housing groups and corporate investors say that projects have been delayed and investment decisions put on hold because of the uncertainty. Some of the leading corporate investors in the past have been JP Morgan Chase, Citigroup, Bank of America, Berkshire Hathaway and the Wells Fargo Bank. In public, many housing lobbyists say that they believe that the administration did not intend to scuttle the housing credit, which has had strong bipartisan support in Congress. But housing groups, both those with Democratic and Republican affiliations, say that administration officials, including some close to Karl Rove, have pressured them in recent weeks to avoid criticizing the tax cut package. "Some others have felt intimidated about raising this issue because they are worried that they will lose favor with the White House," said F. Barton Harvey 3d, chief executive of the Enterprise Foundation, which is another major nonprofit group that helps to administer the financing of the projects. Some housing groups with close ties to the Bush administration say that it is necessary to move slowly and cautiously, stressing what they say are the overall economic benefits of a dividend tax cut. A study issued last week by the Mortgage Bankers Association of America, said, in fact, that "a failure to pass the administration's growth plan would negatively impact" housing credit prices. "We need to go slowly, let some of the political fires die down a little, so that more rational heads prevail," said Gerald M. Howard, chief executive of the National Association of Home Builders. For her part, the housing commissioner, Ms. Perine, disagreed with the most dire predictions of the impact of the White House's tax proposal: that the mayor's housing plan would be completely undone. "You have a generation of housing and community development professionals who don't remember life without these things," she said. "But in a worst-case scenario, we're potentially looking at one source of funding maybe not being stretched as far, and we'll have to find other ways of doing that. Our plan is still very much in play, and we're still completely committed to it." _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
