A Simple Tweak to the Federal Tax Code Would Support More Affordable Housing

Research & Policy | October 18th 2017 | Mark Willis

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With the rise from 2013 to 2015 in U.S. renter households facing severe housing burdens, federal support for programs to preserve and create affordable housing remains critical. As the tax reform framework recently released by President Trump and the majority leadership explicitly noted, federal Low Income Housing Tax Credits (LIHTCs) provide “incentives (that) have proven to be effective in promoting policy goals important in the American economy.” However, the Framework was silent on another tax program that benefits the production of affordable housing that should be preserved and improved.

This program is tax-exempt private activity bonds (“tax-exempt bonds”) which also generate “as-of-right”, four percent housing tax credits (“housing credits”) when the bonds are used for affordable multifamily housing. The combination of tax-exempt bonds and housing credits has played an important role in state and local production of affordable housing. In fact, some 40 percent of all the housing credit developments nationally are generated through tax-exempt bond financing, rising to as much as 85 percent of the total in places such as New York City. And the importance of the use of these bonds with their “as of right” housing credits is increasing nationwide as a way to preserve the existing housing stock, including for the preservation of public housing taking advantage of the Rental Assistance Demonstration program.

Not only are tax-exempt bonds still needed to address the nation’s housing needs, but a tweak to the tax-exempt bond program would allow for even more effective use of this important tool. The combination of the tax-exempt financing and housing tax credits, which can be sold to corporate investors, provides a powerful incentive for the production and preservation of rental housing for low-income households. 


Today, Affordable Housing Competes With Other Uses for the Volume Cap

The availability of tax-exempt bonds is subject to an annual limit– known as “volume cap”— determined according to each state’s population size. States and localities can use the cap to support a number of uses including economic development, homeownership, and rental housing. However, only rental housing can generate “as-of-right” four percent housing credits, and then only if at least 40 percent of the units are affordable to households earning no more than 60 percent of the local area’s median income or 20 percent are affordable to those earning no more than 50 percent of the area’s median income.

Given the multiple uses competing for volume cap and the need for more affordable housing, states and localities should be allowed to make as effective use as possible of “as-of right” housing credits without having to shortchange other valuable, eligible uses. A simple tweak to the tax-exempt bond program is all that is needed.


Tweak “Recycling” to Allow More Effective Use of Tax-Exempt Bonds for Affordable Housing

The key for being able to use tax-exempt bonds more effectively for affordable housing already exists as a result of “recycling” (technically a form of refunding) which was first allowed in the Housing and Economic Recovery Act of 2008 (“HERA”). Recycling allows for reuse of tax-exempt bonds that are only needed for a few years, far short of the potential years of tax exempt financing possible with private activity bonds. While it may seem to be inefficient to allocate any of the tax-exempt bonding authority to be used for just a few years, the interrelationship between tax-exempt bonds and housing credits requires an initial level of bond financing that will no longer be needed once a project has completed construction and been placed in service. At that point a developer can sell the housing credits and use the proceeds to reduce the amount of debt to a level that can be supported with rents at affordable levels.

The ability to recycle these short-term bonds has meant that years of tax-exempt financing do not have to be sacrificed when using housing bonds to fund affordable housing. HERA, though, did limit the use of recycled bonds to “residential rental projects,” thereby excluding their use for economic development and single-family programs. Those programs accordingly continue to place demands on volume cap.  Moreover, HERA imposed restrictions on the recycling: the recycled bonds had to be issued within six months of the repayment of the original loan and could not be used with housing credits.   

Even with these limitations, HERA helped enormously. For New York State, alone, it brought nearly $2 billion more in recycled tax-exempt bond financing to multifamily rental housing.

A simple tweak to the tax code could lessen the competition for the volume cap by allowing states and localities to use recycled bonds for any eligible purpose. In this way more, if not all, of the volume cap could be used to generate “as of right” housing credits for affordable multifamily rental projects while still allowing for the funding of eligible economic development projects and single-family mortgage programs using recycled bonds.

For New York State, my analysis of the allocation of volume cap over the last five years shows that over 87 percent was used for affordable housing. This tweak could free up an additional annual average of $245 million in volume cap that could be used for multifamily deals with “as-of-right” housing credits. Other states that are strapped for volume cap would also be able to more effectively utilize the volume cap for the production of affordable multifamily housing.

Another modifications that could further facilitate using recycled bonds for any and all eligible uses would be expanding from six months to a year the time limit on using recycled bonds after the pay down of the original loan.



Expanding the activities eligible for recycled, private activity bonds would be a true game-changer. In New York State alone, this change could annually free up “as-of-right” housing credits on an additional $245 million in bonding authority. And it would not require any reduction of focus on such other eligible uses as homeownership and economic development. By eliminating the need for eligible uses to compete over the private activity bond cap, the full potential of the existing authority for housing credits could be realized. Of course, tax-exempt, private activity bonds will first have to be preserved in any potential tax reform legislation.


Mark Willis is the Senior Policy Fellow at the NYU Furman Center.  For more detail on the source and use of the data for this analysis, contact the author at [email protected].

Mark Willis is the Senior Policy Fellow at the NYU Furman Center, conducting research, writing, and speaking on such urban-related policy issues as affordable housing, housing finance reform, community development lending and investment, and the Community Reinvestment Act. Before joining the NYU Furman Center, Mark was a Visiting Scholar at the Ford Foundation, working on research related to community development and the financial services sector. Prior to his time at Ford, he spent 19 years at JPMorgan Chase overseeing its community development program, serving as Executive Vice President and Founding President of the Chase Community Development Corporation. Mark has also held positions with the City of New York in economic development, tax policy, and housing, where he was the Deputy Commissioner for Development at the Department of Housing Preservation and Development. He also worked as an urban economist at the Federal Reserve Bank of New York. Mark has taught Housing and Community Development Policy at New York University’s Law and Wagner Schools. He co-chairs the Economic Development and Housing Committee of the Citizens Budget Commission, chairs the Program Planning Committee of the New York State Energy Research and Development Authority, and serves as a Board Member of the National Housing Conference, National Community Investment Fund, and a number of other boards involved with housing and community development. Mark has a B.A. in economics from Yale University, a J.D. from Harvard Law School, and a Ph.D. in urban economics and industrial organization from Yale University.

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