Tax Reform’s Potential Effect on LIHTC Equity Markets, Affordable Housing

An increasing number of local news reports have been contemplating the effect of President-elect Trump’s proposed tax policies on affordable housing. Specifically, many worry how his plan to slash the corporate rate, if fulfilled, would limit the expansion of much-needed affordable housing. President-elect Trump campaigned on a top tax rate of 15 percent for corporations. And in their tax reform “blueprint,” House Republicans have targeted a lower top corporate tax rate of 20 percent.

Low-income housing tax credits, which companies purchase to lower their tax liability, are one of the primary funding sources for new subsidized housing. If the plan to lower the corporate tax rate materializes, this would reduce the incentive for companies to invest in tax credits because they would have smaller tax liabilities.

Novogradac & Company has performed calculations estimating the effect of the corporate tax rate dropping to various levels. They’ve concluded that lowering the top corporate tax rate from 35 percent could lower the investor equity price per credit by as much as $0.17, depending on how low lawmakers are able to drop the top tax rate. This would substantially reduce the amount of equity available to build and preserve affordable rental housing.

According to Novogradac, in 2015, the annual LIHTC equity raised was about $13 billion, of which approximately $3 billion was in the 4 percent market. Based on that total, Novogradac estimates that a reduction of as much as $2.2 billion, or more, in annual LIHTC equity would be available under various tax reform proposals. Using historical unit production data from the National Council of State Housing Agencies, this reduction in equity could translate into as many as 16,000 fewer affordable rental homes created or preserved each year.