Under The Microscope: Questioning Low-Income Housing Tax Credit's Impact And Future
Carl Miles' apartment at Rosie Shields Manor has everything he could want in a home – and then some.
Miles’ spacious room has sleek wood-like floors and a modern-looking kitchen. He’s within walking distance of a bank and grocery store. And he can even throw parties in the Pagedale facility’s community room or common area – with management’s permission, of course.
“It’s wonderful. It’s a wonderful place to live,” said Miles, who is 70 and retired. “It’s got a lot of security. The people are generally pretty friendly. We socialize a lot. And we have a pretty good time.”
From his description, it may be safe to assume that Miles resides in a retirement community or a swanky nursing home. But Rosie Shields Manor is an affordable senior facility developed with federal and state low-income housing tax credits.
With amenities galore and an aesthetically pleasing environment, it’s not surprising that Rosie Shields Manor is completely full – and has a waiting list. People like Miles are able to live there for around $500 a month. Beyond Housing executive director Chris Krehmeyer says the low rent wouldn’t be possible without the tax credit.
“Without the subsidy of the tax credit would bring, we couldn’t build this facility and rent it to people who live in this community,” Krehmeyer said. “They’d have to give literally 100 percent of their monthly income for the rent.”
There’s little question that the low-income housing tax credit spurred both for-profit and non-profit entities to develop housing for the poor, elderly and disabled. It’s been credited with creating 46,700 housing units throughout Missouri since 1998.
But for the last few years, the incentive has been under intense scrutiny – primarily from conservative legislators in the Missouri General Assembly. They say the credit is inefficient and wasteful, especially when lawmakers have had to cut spending elsewhere.
“These things all came to be in periods of time when state governments were flush with cash,” said Sen. John Lamping, R-Ladue. “Nobody was worrying about where they’d have to save $10 or $20 or $50 million. They were more interested in where they’re going to allocate the next $100 million.”
“That’s where they’ve all started,” he added. “And we’ve created a very narrow focus group of people that benefit tremendously by this.”
For the most part, the legislative debate hasn’t produced many results. But that may change this year. The House last week passed legislation lowering the total amount available for low-income housing credits. And there’s a growing movement in the Missouri Senate to link the tax credit issue to tax cuts.
The low-income housing tax credit essentially works like this:
A for-profit or non-profit company comes up with a housing proposal for the working poor, elderly or disabled and presents it to the Missouri Housing Development Commission (MHDC). The commission is responsible for doling out both state and federal low-income housing tax credits and it has the final say of what projects get approval.
If MHDC approves a project, the credits are eventually issued in 10 equal increments over a 10-year period. The credit eases a business or individual’s state tax liability.
Typically, the tax credits are sold to banks or syndication firms, with the proceeds from that sale going toward bringing down development costs. That, in turn, allows a housing facility to charge lower rents.
The credits come with some strict stipulations. Facilities that receive them must dedicate most of the units to people below a certain income level (or, in the case of senior facilities, an age level). And the Internal Revenue Service can take some of the credits back if the facilities are run down or managed in a slipshod manner.
Proponents of the low-income housing credit say that the incentive saves money in the long run. For instance, the state has to pay for needy seniors to live in nursing homes. They contend affordable senior housing costs less, because tenants are paying their own way.
Charles Henry embodies why proponents feel the low-income housing tax credit is worthwhile. Henry spent nine months in a nursing home before finding an apartment at Rosie Shields Manor. The 61-year-old says his experience has been “a blessing.”
“It’s very important. I feel like it’s essential, because people are now on limited income,” Henry said. “I’m making half the amount I was making and I’m able to still live kind of comfortable.”
Beyond Housing's Krehmeyer said the process to land the credits from MHDC is “hyper competitive.” He said in the last five to seven years, the competition became fiercer because rural developers got into the act.
According to MHDC, Missouri issued from 2004 to 2013 on average $50.8 million in credits for projects in the city of St. Louis and St. Louis County.
Stephen Acree says if it weren't for the tax credits, he wouldn't be able to offer fairly spacious, three-bedroom apartment in Forest Park Southeast to families for around $650 a month. It’s one of numerous units that Acree’s group – RISE Community Development – redeveloped in the past decade, helping to spawn the redevelopment of that neighborhood, he said.
People throughout Forest Park Southeast, Acree said, identified absentee rental properties a major problem. Using both low-income and historic preservation tax credits, Acree’s group was able to redevelop 72 apartments throughout the neighborhood.
He said Forest Park Southeast is “a perfect example of where affordable housing development is a tool to do neighborhood stabilization and reinvestment.”
“So in this neighborhood, when we originally did this, there were a whole lot of problems going on in the neighborhood,” said Acree, whose organization helps other non-profits on neighborhood and community redevelopment projects. “There had been some drive-by shootings. There was a lot of problem properties and open-air drug dealing.”
By getting control of 36 buildings in the neighborhood, Acree says "smaller investors" began to come in.
It’s not just non-profit companies using the credit. Brian Poulin’s for-profit company purchased and rehabbed Minerva Place, a former gymnasium in the Hamilton Heights neighborhood of St. Louis. They turned it into a low-income senior facility.
Poulin – the president of the Maine-based Evergreen Partners – said his company’s developments have the “look and feel” of a “market-rate” property. That means each unit has wood-type floor, high-end cabinets and new appliances.
As with Rosie Shields Manor in Pagedale, Minerva Place is full. According to Poulin, it has a “very long” waiting list.
Poulin also sees the property as a revitalizing force in the north St. Louis neighborhood.
“We end up spending millions of dollars on this renovation all pumped into local contractors,” Boulin said. “And when the neighbors start seeing a new property and a new owner and a new feeling for this property, it quite often will bring a catalyst of change for the other properties around it.”
Under the microscope
Even critics of the tax credit agree that the incentive has a noble purpose. But that hasn't stopped long-running questions about the credit's cost and efficiency.
Lamping, for instance, doesn’t dispute that the credit is “meant to deal with a real issue, which is the availability of low-income housing.” But he also said that he felt that the program itself is "very flawed.”
Lamping is part of a group of Republican senators that have been critical of the program. He and other lawmakers say the state spends way too much on a program that isn’t very efficient. And while he would prefer to rely on the federal tax credit, he's amenable to decreasing the amount of tax credits issued annually from roughly $140 million a year to $110 million a year.
“What we’re trying to do, a handful of us in the Senate, is say ‘look, this program is way too big,’” Lamping said. “We think it’s very inefficient.”
Lamping’s contentions may have received a boost from state Auditor Tom Schweich. According to the audit released this week, only 42 cents of every tax credit dollar goes toward building low-income housing. The remainder goes to, among other things, the federal government in the form of increased federal income taxes, to syndication firms and to investors.
Schweich’s audit also revealed that with $144 million worth redeemed in 2013, the low-income tax credit is the state’s largest tax credit. What's more, the Missouri version of the program costs more per capita than other states, including big ones like California or New York.
That sort of statistic resonates with Sen. Will Kraus, R-Lee’s Summit. Kraus -- who sponsored legislation to lower the cap of the low-income tax credit -- says it makes no sense to be issuing so many credits at a time when the state is “underfunding” K-12 education.
“At some point it’s about give and take. It’s about balancing the budget and meeting the priorities we have out there,” Kraus said. “I just think we’re spending too much money on this one program and we should bring it down to a more reasonable level.”
While primarily Republicans have supporting curtailing the credit, it’s also found an ally in Gov. Jay Nixon. The Democratic governor’s administration even convinced MHDC to delay issuing low-income housing tax credits in late December, including Beyond Housing’s Pine Lawn facility.
“It’s a question of fairness,” Nixon said in a statement earlier this year. “For too long, these programs have allowed wealthy developers and special interests to reap massive windfalls at taxpayer expense.”
Lamping and other lawmakers have echoed the governor's sentiments. They've taken issue with how some businesspeople profit off of the tax credits. The St. Louis Post-Dispatch reported recently that four companies purchase a big chunk of the tax credits.
And Lamping said the fact that so many projects come before MHDC shows how lucrative the incentive could be.
“The fact that there’s 90 projects that are trying to get this credit speaks to the financial advantage this credit brings to these projects,” Lamping said. “It’s a very profitable venture to go into.”
Krehmeyer disputed that the program is a sop to developers or syndicators. He said low-income housing produces "a very modest amount of cash flow" because rents are low.
"This is very consistent with how this industry works all across the country," he said. "It is a not a waste of the taxpayer dollars. I would allege that it is, quite frankly, a big asset to the taxpayers of Missouri. That's because of the longitudinal and residual benefits that happen when we produce affordable housing, house people who need a decent, safe place to live and ensure that our neighborhoods are getting stronger."
For years, lawmakers such as Lamping and Kraus have grappled with lowering the amount of low-income tax credits that can be issued every year. But those efforts have often gone nowhere.
They’ve primarily run into opposition from an unusual coalition: Democrats representing urban areas and a segment of Republicans.
A good example of this coalition is Lt. Gov. Peter Kinder, a Republican, and Sen. Maria Chappelle-Nadal, D-University City. The two don’t see eye-to-eye on many issues, but both oppose steep cuts to the tax credit.
Chappelle-Nadal said the tax credit is important for her district, which includes Pine Lawn and Pagedale.
“While some families in suburban areas are recovering much quicker at a quicker rate, families that live in high-poverty areas, it’s taking a longer time to recover,” Chappelle-Nadal said. “And because families are doubling and tripling up in many cases, we’re trying to find avenues where we can help families start all over again. And part of that is to have a low-income tax program that give families a second chance.”
During an appearance on the Politically Speaking podcast, Kinder took things a step further. He disputed that the public at large is clamoring to clamp down on tax credits, adding that it’s a “hobby-horse” of some Republican senators and Nixon.
“I have been traveling this state every corner, every county,” Kinder said. “And in three statewide campaigns meeting tens of thousands of Missourians, I have never had one soul come up to me and complain about tax credits.”
But there’s evidence that not everyone opposes the delay, and the issue is gaining momentum.
The House, for example, passed a bill last week to lower the program’s cap to $110 million. What's more, Nixon said that he might sign a tax cut bill that's linked to reducing tax credits. That type of deal, Kraus said, “gives incentives to everyone to come to the table and get agreement.”
These types of maneuvers worry Acree and Krehmeyer. A lower cap, they say, means fewer opportunities to develop affordable housing.
Both Krehmeyer and Acree say the demand for affordable housing isn't going away.
“What I can convey is that there are so many families and so many kids and seniors and disabled individuals in the St. Louis region that don’t have a decent, safe and affordable place to live,” Krehmeyer said. “Until we find different and other vehicles to produce affordable housing for people who live and work in our region, this is the best tool and quite frankly the only real tool to develop any affordable housing units in St. Louis.”
Lamping is skeptical about that type of argument, especially since most states don't have a state low-income housing tax credit. Both he and Schweich suggested that it might be more efficient for the legislature to directly appropriate money for low-income housing, rather than use the tax code.
He added: “How could it be that Missouri’s been spending hundreds of millions of dollars for going on 15 years to fill this low-income housing need?”
“Is it an endless low-income housing need the state has?” Lamping asked. “Show me the analysis that says that is in fact. And the question I would have is: ‘How the 35-plus others states – how do they meet their low-income housing need?’ Why would their low-income housing need be any greater than ours?”