[Date]
The Honorable Senator [Name]
[Name] Office Building, Room [Room Number]
Washington, D.C. 20510
Dear Senator [Name],
I am writing in my capacity as the (Job Title) for the (Tribe or Organization). As the Senate considers comprehensive tax reform, I ask that you urge Senate Finance Committee Chairman Max Baucus and Ranking Member Orrin Hatch to protect and strengthen the Low-Income Housing Tax Credit (LIHTC) and New Markets Tax Credit (NMTC) programs to ensure that our Tribe and other tribes continue to benefit from these critical housing and economic development funding sources.
Senator Baucus and Hatch’s June 27 “Dear Colleague” letter outlined their “blank slate” approach to tax reform, in which they will initially eliminate all exclusions, deductions and credits, and will only add them back in if they have sufficient support from their colleagues in the Senate. Only tax provisions that are proven to help grow the economy, make the tax code fairer or effectively promote other important policy objectives will be added back into the tax code, with special preference for those with bipartisan support. Please consider the following information that demonstrates that the LIHTC and NMTC programs meet all of these criteria: (As an aside, these programs also provide answers to the questions raised during the Senate Committee on Indian Affairs April 2013 Oversight Hearing on Identifying Barriers to Indian Housing Development and Finding Solutions).
LIHTC Program and Indian Country
Indian Country has utilized the LIHTC program to finance more than 175 Tribal low-income housing projects by Native organizations located in 18 different states. These projects represent a total of well over $500,000,000 in private investment equity and resulted in the building or rehabilitation of more than 4,800 housing units. The need for housing on our reservations is great, and the funding resources are scarce. Native American Housing Assistance and Self Determination Act (NAHASDA) funds have not kept pace with inflation and increases in the costs of items such as electricity, maintenance materials, and fuel necessary to successfully manage Tribal housing programs. Without the LIHTC program fewer than 50 percent of the units discussed above would have been built or renovated. The LIHTC program provides private equity and allows our Tribe to leverage NAHASDA and other grant funds to maximize our housing programs. Our current Tribal housing waiting list contains _____ names of households waiting for affordable housing. The majority of these households may wait more than one year for a home to become available.
Helping to Grow the Economy
Because of a growing shortage of affordable housing, today more than a quarter of all renters pay more than half of their income in rent. Devoting so much family income to housing can be a destabilizing force for many households, leaving insufficient income available to meet basic needs for food, health care, education and transportation. This contributes to residential instability, undermines educational achievement and impairs employment potential.
The LIHTC program addresses this serious social problem by producing close to 100,000 affordable rental homes annually. This stimulates about $15 billion in housing investment annually, which supports 95,000 jobs, primarily in the small business sector, and produces about $7 billion in local income. Since its creation in the Tax Reform Act of 1986, the LIHTC program has leveraged more than $100 billion in private investment capital, providing critical financing for the development of more than 2.6 million affordable rental homes for low-income families. Unlike other tax code incentives that alter investment decisions at the margin, virtually no affordable housing production would occur without the LIHTC program, since it is fundamentally uneconomic to produce rent-limited housing without a subsidy.
[Option - Insert any Tribal specific information on LIHTC projects or need.]
Making the Tax Code Fairer
Today about 35 percent of all households live in rental housing, and their annual income is on average less than half the annual income of homeowners. Yet three quarters of all federal expenditures on housing – tax expenditures and direct spending – go to support homeownership.
According to the June 2013 “State of the Nation’s Housing” report from the Harvard Joint Center on Housing Studies, the country faces a growing affordable rental-housing crisis. In 2011, there were only 6.8 million affordable units for 12.1 million extremely low-income renters nationwide. This affordability gap is exacerbated by higher income households competing with low-income renters for affordable units, as well as by widespread structural inadequacy in affordable housing stock. As a result, there exist only 30 adequate, available, and affordable units for every 100 extremely low-income households in the United States. The gap between affordable units and low-income renters in need of housing continues to widen each year, and the LIHTC program is virtually the only significant source of capital to address this need. As you are no doubt aware, in Indian Country the housing crisis is statistically even worse. On a personal basis, I see families every day living in conditions that nobody should have to endure. It is the LIHTC program that gives us hope that every year we at least have a fighting chance to chip away at our housing predicament.
Ironically, the LIHTC program is widely considered to be the most effective affordable rental production program in the history of the nation, yet it accounted for just 3.3 percent of all federal housing expenditures in FY 2012, or 4.3 percent of all federal housing tax expenditures. Removing the LIHTC program from the tax code would harm low-income families in search of an affordable home and make the tax system less fair.
Effectively Promoting Important Policy Objectives
As a result of being administered through the tax code, the LIHTC brings with it important private sector market discipline that makes it an efficient means of creating new affordable housing. The private sector manages property site selection, financial underwriting and ongoing tax code compliance monitoring of the projects, and assumes all of the construction and lease-up risk associated with LIHTC-financed properties. The ability to claim tax credits and maintain the targeted rate of return on investment is determined by the project’s compliance with the income targeting and rent restrictions in the law. This “pay-for-performance” model has led to extremely effective management and oversight of the program and produced an extraordinary low level of foreclosure—a cumulative rate of only 0.62 percent between 1987 and 2011, according to an analysis by the accounting firm CohnReznick.
Other Provisions That Should be Added or Reformed as Part of Tax Reform
In addition to preserving the LIHTC program as part of tax reform, two changes are needed to ensure the program will continue to provide access to private equity sources for affordable housing in Indian Country. First, a change should be made in the formula used to determine the tax credit rate as proposed by legislation introduced in the 112th Congress, S. 1989. This bipartisan legislation would replace a faulty formula that determines the amount of housing tax credits a property receives based on the interest rate paid by the federal government with the flat 9 percent and 4 percent credit rates that were in force when the program was first enacted.
The minimum 9 percent rate has been extended on a bipartisan basis since the enactment of the Housing and Economic Recovery Act of 2008, and S. 1989 and its companion legislation in the House received bipartisan support in the 112th Congress, but the rate is set to expire at the end of 2013. Under the “floating rate” formula, every movement in the federal cost of borrowing would change the amount of tax credits that go to support development of LIHTC affordable housing. This reduces the amount of equity that can go into any given project without actually reducing the cost of the program, creates uncertainty that is disruptive of the development process and is not actually supported by any public policy rationale.
Second, a modification is needed to Section 42(m) to encouragethe state housing finance agencies (HFAs) to develop scoring systems in their Qualified Allocation Plans (QAPs) that create a more even playing field for the Tribes. In recent years, many state HFAs have added scoring categories that prevent Indian Country LIHTC projects from meeting even the minimum scoring requirements needed to effectively compete for tax credits. State HFAs have no incentive to create language in their QAPs that would allow a Tribal project to effectively compete for the general pool of available tax credits. A change to I.R.C. Section 42(m) is needed to ensure that the HFAs will not be able to creatively draft QAP language that would satisfy current regulatory requirements and still work to effectively prevent a Tribal LIHTC project from scoring well. A copy of the proposed modification to I.R.C. Section 42(m) is attached.
NMTC Program and Indian Country
Rural communities located outside of Indian Country have access to multiple funding vehicles to help spur economic development. These communities can issue bonds based on local property tax revenues, provide tax increment financing or some other state tax incentive to attract a big employer to a small town. These sources are not available to American Indian, Alaska Native and Native Hawaiian communities. In an era when virtually any important local economic development project receives some local tax subsidy, how is it that American Indian, Alaska Native and Native Hawaiian leaders are succeeding without access to these tools? The same way Native communities have always battled against the dire economic conditions: collaboration and creativity. Indian Country leaders have shared information, pooled best practices and contributed financial resources to help Native communities bring hundreds of millions in private investment through the New Markets Tax Credit (NMTC) program.
The NMTC is a federal incentive that attracts equity from financial institutions to intermediaries called community development entities (CDE). These CDEs use this equity to make flexible, low-cost loans and equity investments that support vital public services and job-creating projects. This is not just a program for Indian Country; CDEs have deployed billions in communities of high unemployment and poverty since 2000.
The NMTC is a proven incentive that spurs private sector investment in low-income communities. The Credit delivered more than $55 billion in capital to economically distressed rural and urban communities between 2003 and 2011, directly creating over 350,000 jobs, at a cost per job of less than $20,000. According to a 2007 U.S. Government Accountability Office (GAO) report, 88 percent of NMTC investors would not have made their investments if not for the incentive of the Credit.
[Option - Insert any Tribal specific information on NMTC projects or need.]
Helping to grow the Economy
The NMTC is a cost effective tool that pays for itself. NMTC investments in businesses in low-income communities and the jobs created by those businesses, generated more than $5.4 billion in federal tax revenue between 2003 and 2010, covering the $5.3 billion cost of the program over the same period. I know of at least 18 projects since 2006 alone that have generated over $50 million in private equity that has leveraged more than $300 million in construction, rehabilitation, and equipment installation in Native American, Alaska Native and Native Hawaiian communities.
Making the Tax Code Fairer
The NMTC is a unique and flexible incentive. The NMTC is the only incentive that provides both the flexibility to finance a variety of businesses and projects in these communities as well as an effective, established system to deliver that financing. The Credit does not target a specific type of business or sector. Instead of Washington picking winners and losers, the NMTC places the project underwriting responsibility with community development organizations with deep ties to the communities in which they work.
Effectively Promoting Important Policy Objectives
For decades the federal government has sought ways to achieve the goals of creating jobs, encouraging the development of sustainable communities and other outcomes while decreasing direct grant support of these activities. During this time, the NMTC is an example of a program that has developed to attract private capital to projects that can achieve the public objectives. In this sense, the NMTC fits into a pattern of other programs and policies that seek to drive private capital toward focused sectors in which direct federal expenditures are not preferable for feasible. The NMTC achieves this public policy objective.
Please help ensure that the LIHTC and NMTC programs will continue to serve as excellent examples of how private dollars can work to address affordable housing and economic development needs through effective and efficient public-private partnerships by urging Senators Baucus and Hatch to protect and strengthen the LIHTC and NMTC programs in their tax reform effort.
Sincerely,
[Name]
[Title]
[Organization]
[Address]
Attachments:
Attached Section 42(m) language change
Add example/summary attachments of specific LIHTC/NMTC projects