The new Republican tax overhaul will likely chop plans for thousands of new affordable homes in California and further squeeze low-income renters, but experts say the impact could have been more severe.
The tax law, signed by President Donald Trump last week, preserved two threatened federal programs that are key to building tens of thousands of affordable homes in California — low-income housing tax credits and tax-exempt private activity bonds.
But experts estimate the new tax rules could still reduce federal funding for subsidized housing in the state by 20 percent, translating to roughly $500 million a year of projects and 4,000 new units lost.
“The worst possible hits were taken out of the bill,” said Carolina Reid, assistant professor of city and regional planning at UC Berkeley. But, she added, “It does nothing to actually promote affordable housing.”
Advocates say the need for affordable housing has become more visible and urgent, as Bay Area residents priced out of expensive apartments turn to alternatives — from sharing crowded houses and apartments with family, friends and strangers, to living in vehicles and RVs.
Last year, federal programs helped developers and the state build and renovate about 20,000 subsidized homes and apartments in California. Killing the tax credits entirely would have put several Bay Area projects at risk, including nearly 1,400 units in San Jose, 1,500 in Oakland and as many as 10,000 in San Francisco, according to city planners. Statewide, it would have taken away exemptions that typically generate more than $2 billion annually for affordable housing construction in California.
The nonprofit California Housing Partnership estimates that California still needs about 1.5 million more subsidized housing units to meet current demand.
Republican lawmakers say the corporate tax cuts contained in the tax overhaul will spur business investment, boost the economy and eventually translate into higher wages for workers. A booming economy could spur more activity in the housing market, they argue.
But nonpartisan scorekeepers say the tax plan, which permanently slashes corporate rates from 35 to 21 percent and delivers smaller, temporary cuts to families and individuals, will not pay for itself with new economic activity.
The once-threatened affordable housing provisions survived, but with nicks and dings that experts say will lower financing and could lead to as many as 50,000 fewer affordable homes for low-income families and seniors being built in the state over the next decade.
That’s because a lower corporate rate means businesses will pay less in taxes, and have fewer incentives or need to purchase tax credits. With tax credits becoming less valuable, the amount of money flowing into affordable housing projects is expected to decrease.
“By lowering the corporate rate from 35 to 21 percent, without any malice, the GOP just took away $500 million a year of affordable housing in California,” said Matt Schwartz, president and CEO of California Housing Partnership.
Schwartz said lawmakers were offered provisions to offset the impact on affordable housing, but chose not to include them in the final bill. “We need the states to step up to address the loss,” Schwartz said.
California expects to put a $4 billion affordable housing measure before voters in November 2018, one of several hard-fought efforts approved in the state Legislature this year to address the state’s housing crisis.
Shishir Mathur, associate dean and professor of urban and regional planning at San Jose State, said the new plan could have a substantial impact, particularly in the Bay Area. The federal programs are “really important for high-cost areas,” Mathur said. “We’re trying to go forward, but now we’ve been set back significantly.”
Coincidentally, the low-income housing tax credits were established during the 1986 tax reform under President Ronald Reagan as a way to encourage private sector investment in affordable housing, Mathur said.
But that Reagan-era solution to the lack of affordable housing almost didn’t survive the final tax bill. Republicans stripped the tax exempt provisions from an initial version to pay for other tax cuts.
With nonpartisan estimates that the new tax code will create around $1 trillion in federal deficits over the next decade, UC Berkeley’s Reid said housing advocates will have to watch out that future budgets don’t cut deeper into other federally subsidized housing programs.
Reid said California should seek innovative solutions to the growing demand for affordable housing. The state could serve as an incubator to test new ways to reduce building costs, or try pilot programs offering tax credits for renters.
“California has a role to play” she said, “and can be a leader in this area.”
Affordable housing takes hit under GOP tax plan