Tax subsidies for affordable housing cry out for reform

When it comes to California’s persistent shortage of affordable housing, the default position for many politicians is to promote tax credit schemes to incentivize investment in more building.

Last year alone, California committed $3.4 billion in taxpayer-subsidies for super wealthy investors (as credits taken against their future tax liabilities) who put up money to build affordable units. Our state finances about half of its annual affordable housing production this way and recently added $500 million in new state credits to be awarded alongside federal credits.

A recent study did a deep dive on how these arrangements work, who benefits and who doesn’t. The findings may surprise you.

First, it turns out that taxpayers give more in credits to investors than they get back in project financing. Only 94 cents of every federal tax credit dollar goes to affordable housing projects, on average. The rest goes to investors and financial middle-men. California taxpayers’ rate of return on state credits is lower: Developers receive only 80 cents of every credit dollar. These “excess credits” are a boon to investors, but they add as much as $26,000 to the total cost of every affordable unit built in California.

Second, whatever you’ve heard about onerous regulatory costs on California housing likely was overblown. Data from projects approved by California’s Tax Credit Allocation Committee show local government impact and permit fees capture just 4% of affordable housing development costs, on average, while landowners, investors, developers, construction firm owners and banks take 35%.

And finally, there’s the matter of construction workers’ pay. Construction labor only accounts for about 14% of all project spending. Unlike other forms of publicly financed construction, affordable housing builders are not required to pay their workers anything beyond minimum wages in order to qualify for tax credits.  Even as the housing industry complains of labor shortages, 53% of California construction worker families qualify as “low income” or “very low income,” according to an analysis of U.S. Census Bureau and U.S. Department of Housing and Urban Development data.

These three points are cause for alarm for anyone who is concerned about housing affordability in California.  What they show is that billions of California tax dollars set aside each year to build low-income housing effectively make the economic inequality at the heart of our state’s housing affordability problems worse – particularly for people who do the actual building.

The data cries out for reform of the housing tax credit system.  If California taxpayers are to increase subsidies to wealthy investors who fund affordable housing production, they should get more in return.

One way to do that would be to link receipt of credits to the same construction prevailing wage standards that apply to other publicly funded projects. This way, more of the workers who we all rely on to build California’s housing will be able to pay the rent in their communities.

The clear preponderance of research has shown that prevailing wages do not increase construction costs. Instead, they reduce project costs for materials and other purchased services and deliver higher levels of efficiency and productivity through employment of workers who have completed years of training. Training and good wages reduce accidents and employee turnover on the jobsite, which can drain project budgets. And the standards include private contributions to apprenticeship programs that help ensure a stable supply of workers trained to meet California’s housing supply needs for generations to come.

Or we could keep doing things as we have been – yearly committing hundreds of millions more in tax dollars to wealthy investors more than we get in return, blaming the production failures on local regulations that simply aren’t draining project budgets, and paying many of the workers who do the arduous, hazardous work of building housing less than they’d make working for Amazon.

How’s that been working out?