Low-Income Housing
4:38 pm
Mon March 10, 2014

Schweich's Audit Questions Efficiency, Impact Of Low-Income Housing Tax Credit

State Auditor Tom Schweich released an audit critical of Missouri’s low-income housing tax credit, saying that the widely used incentive is inefficient and has a “very low” return on investment. 

photo of Thomas Schweich
Credit Provided by the auditor's office

And the Republican statewide official is hoping the audit will spur the Missouri General Assembly to break a years-long logjam on changing the state’s largest tax credit program.

“We’ve pointed out a whole slew of new problems – as well as a few old ones that have not been fully addressed,” said Schweich in an interview. “And we’re hopeful that the legislature, which is very actively considering this program right now, will implement the remaining recommendations.”

The state’s low-income housing tax credit is an incentive to develop housing for the working poor, elderly and disabled. Since 1998, according to Schweich’s audit, the tax credit helped develop 46,700 units of housing throughout the state. (There is also a federal low-income housing credit.)

The credit is complicated but essentially works like this: A for-profit or non-profit company comes up with a housing proposal and presents it to the Missouri Housing Development Commission. If MHDC approves the project and issues the credits, they’re usually sold to banks or a syndication firm. The proceeds from the sale of those tax credits go toward bringing down development costs. That, in turn, allows a housing facility to have lower rents.

Schweich’s audit released on Monday said that $144 million worth of low-income tax credits were redeemed in 2013, making it the state’s largest tax credit program. And while the audit says there’s “no dispute” that the tax credit “has helped provide thousands of units of affordable housing for low income Missourians,” it  questioned the program’s efficiency.

(Click here to read the audit.)

According to the audit, only 42 cents of every tax credit dollar goes toward building low-income housing. The remainder goes to the federal government in the form of increased federal income taxes, to syndication firms and to investors.

“I’ve personally visited some of those units, as have members of my staff. They’re beautiful. And they allow people who otherwise wouldn’t be able to have that standard of living to have it. We’re not disputing it is succeeding in putting people into affordable housing,” Schweich said. “Our issues are with the efficiency of the program.”

Schweich recommended that the legislature limit the amount of tax credits issued annually and place an expiration date on the program. An expiration date “requires the matter to be debated” and prompts the program “to be evaluated from top to bottom in order for it to continue,” said Schweich.

He also suggested ways to make the program more efficient, including reducing the number of years the tax credits are issued out and making them refundable. (As of now, the tax credits are issued in equal 10-year increments. That means if a project gets $1 million in credits, a recipient gets $100,000 worth of credits every year for 10 years.)

Another option is what’s called a “direct appropriation.” That means, said Schweich, “that the legislature sets aside a certain amount of money to be used to build low-income housing, rather than using the tax code as a means to do it."

Economic flop?

The audit also questioned the economic impact to the state, adding that the program returns 8 cents in state revenue for each dollar spent. It also states that the credit created 63 jobs.

Based on the redemptions of $144 million in 2013, the audit calculated that the program cost the state  $61,000 a unit of housing or $2.3 million a job. 

“And that number is actually overstated to some extent,” Schweich said. “Because that assumes that none of this housing would be built if it were not for the credit. And, in fact, even our own Department of Economic Development acknowledged that some of the housing would be built, even if there were no state credit because there’s already a federal credit.”

In a response within the audit, the state's Department of Economic Development said that the program was not designed primarily to boost the economy. The credit, it said, “should be viewed in context of the program’s other goals.”

“Many non-economic tax credit programs also provide community value that cannot be easily quantified in dollars terms further disadvantaging the activity when fiscal analyses is done,” responded DED within the audit. “Cost-benefit analyses can still be informative in these situations, but should be viewed with these constraints in mind and with other measures that more directly relate to the program’s goals.”

For his part, Schweich said that DED is saying that the tax credit amounts to “a policy decision” that “we want to help low-income people live in nice places.”

“And I understand that. And if that’s the policy decision, that’s fine,” Schweich said. “We’re just pointing out that the economic benefit created by this is minimal.”

Deadlock unlocked?

The audit comes as the Missouri House and Missouri Senate have been deadlocked for years over whether to restrict the tax credit. 

Proponents of the state low-income housing tax credit say the program helps some of the state’s most vulnerable citizens live in comfortable and safe housing. But critics have questioned the program's scope and size, especially after the economic recession caused budget reductions elsewhere.

The Senate has generally wanted to curtail the credit, while the House has often balked. But there’s evidence of some movement. The House, for example, passed a bill last week to lower the program’s cap to $110 million. House Speaker Tim Jones, R-Eureka, said that move showed that the chamber was serious about curtailing the program. (Some senators, though, were critical that the legislation expaned or created other tax credits.)

Schweich said the timing of the audit wasn’t by accident.  He said he released it before the legislature’s spring break so lawmakers will “read this while they’re on their vacation and learn the facts as we present them.”

“Because there’s a lot of detail in this audit,” Schweich said. “And we hope that will allow them to get more sharpened and more effective bills when they come back. And we’re optimistic that they will make improvements to the program.”