Senate Finance Committee Holds Hearing on Increasing Affordable Housing Supply for Working Families
On March 7, 2023, the Senate Finance Committee conducted a hearing titled, “Tax Policy’s Role in Increasing Affordable Housing Supply for Working Families.” The hearing provided an opportunity for Senators to discuss bipartisan proposals to enhance the Low-Income Housing Tax credit (LIHTC), to provide middle-income families with more affordable housing, to revitalize housing in distressed neighborhoods, and to convert commercial real estate into affordable housing and mixed-use properties.
Other topics discussed at the hearing included the rising costs of construction, the impact of zoning restrictions and regulatory barriers on the construction of affordable housing, the impact of inflation on the housing market, the need to address the wealth gap through homeownership, and the impact of institutional and private equity investors on housing demand and housing prices.
Overall, the hearing produced favorable testimony and statements about the LIHTC program and the Affordable Housing Credit Improvement Act (AHCIA). In addition to strong supportive comments made by Chairman Ron Wyden (D-OR), the LIHTC was mentioned a number of times by witnesses and committee members as the most effective tool to address the current affordable housing shortage. Along with our champions, Senators Maria Cantwell (D-WA) and Todd Young (R-IN), Senators Maggie Hassan (D-NH); Ben Cardin (D-MD); Bob Menendez (D-NJ); Elizabeth Warren (D-MA); and Debbie Stabenow (D-MI) made positive comments about the credit. Two of the witnesses offered suggestions for how the LIHTC could be improved, focusing on the need for better data collection to assess the effectiveness of the credit. Senator Chuck Grassley (R-IA) also noted the lack of data and the minimal federal oversight of the LIHTC program. Senator Ron Johnson (R-WI) stated that he is not a fan of using the tax code to “socially and economically engineer.” He suggested a better approach would be to “zero out” barriers, such as unnecessary regulatory burdens, that hamper the production of affordable housing.
Opening Statements
Chairman Ron Wyden (D-OR) (statement) began the hearing by discussing the history of bipartisanship in the Senate Finance Committee to solve “big national challenges,” and he further noted that the next opportunity for a big bipartisan initiative is in affordable housing. He stated that the recent trend of rent increases has been an issue for Americans and said there are multiple congressional proposals to address the growing housing needs across America. Chairman Wyden noted the leadership of Senator Cantwell on the AHCIA and stated he is pleased to be a cosponsor of the bill. Chairman Wyden also announced that he and Senator Young were reintroducing the Decent Affordable Housing for All (DASH) Act, noting the need for a middle-income housing tax credit to provide affordable housing for cost-burdened families such as public safety workers and teachers.
Ranking Member Mike Crapo (R-ID) (statement) opened by noting his appreciation that the Chairman identified affordable housing as an area where bipartisan work could be accomplished. He acknowledged that the LIHTC is responsible for generating the majority of affordable housing and is an important part of solving housing affordability and supply issues. He suggested that restrictive zoning and regulatory barriers also work against the goals of creating more affordable housing.
Witness Testimony
Denise Scott, Local Initiatives Support Corporation, (testimony) discussed the urgent need to expand the affordable housing supply. She stated that it is not just an issue with respect to housing low-income families and noted the difficulty municipalities across the country are having to house teachers, firefighters, and health care workers. She stated that the LIHTC program should be enhanced and noted that changes could be made to the AHCIA that would emphasize long-term preservation of affordability. She suggested that the Finance Committee should consider including qualified contract and right of first refusal provisions in the legislation. She closed by noting her support for the Neighborhood Homes Investment Act, bipartisan legislation introduced by Senators Young and Cardin.
Steve Walker, Washington State Housing Finance Commission, (testimony) was introduced by Senator Cantwell who noted his expertise regarding affordable housing. He testified that the LIHTC is the most effective tool for building affordable housing and stated that the housing credit program is the only federal program that makes it commercially feasible for developers to produce affordable housing. He noted the strong congressional support for enhancing the LIHTC program but also expressed his concern about the expiration of the 12.5 percent allocation increase. He stated his support for the multiple bipartisan bills to strengthen the LIHTC.
Sharon Wilson Geno, National Multifamily Housing Council, (testimony) testified that the challenges of affordable housing differ from community to community. She stated that increased costs and a lack of housing supply are both big issues for many communities. She stated her support for the bipartisan legislation to increase development of affordable housing, and further noted that housing affordability threatens middle-income individuals as well as low-income individuals. Ms. Geno urged that Congress act now, stating that it will take time to reverse the housing supply shortage. She also touched on zoning laws and other regulatory barriers that impede production of affordable housing.
Dr. Mark Calabria, Cato Institute, (testimony) said the national rental market has been softening and said we may be entering an actual oversupply of multifamily housing. He cautioned about adding stimulus to additional construction. Dr. Calabria stated that the development of affordable housing has become overly complex and urged that changes to the tax code affecting housing be coordinated with housing programs under the jurisdiction of the Banking Committee. Dr. Calabria stated that the primary drivers of housing costs are land costs, labor costs, and material costs. To address land costs, he suggested that that Congress consider legislation that would allow for federally-held land to be converted into private land for development of affordable housing. To address material costs, he stated that trade disputes –particularly with Canada — should be resolved.
Garrett Watson, Tax Foundation, (testimony) testified that while the LIHTC has helped tremendously, the administration of the program could be improved. He noted that more data on project development costs would be crucial to understanding and benchmarking the program. He stated that there is an array of programs that overlap with the LIHTC, so it is difficult to gauge effectiveness compared to alternatives. Mr. Watson suggested that reducing the tax burden on investment in housing would help expand the supply of affordable housing. He recommended consideration of a neutral cost recovery system for residential structures, noting that currently investors must depreciate those structures over 27 ½ years, which limits the economic value of depreciation allowances.
Questions and Answers
Chairman Wyden (D-OR) commented that there are a number of firefighters and middle-income individuals needing housing, so much so that many school districts are buying housing to rent to employees. He asked Ms. Geno to discuss the severity of the “missing middle” of individuals who cannot afford housing. Chairman Wyden further discussed changes to the right of first refusal provision with Mr. Walker. Mr. Walker noted that that the current provision leads to bad behavior and ambiguities by “jamming” exit strategies to extract capital out of a deal.
Ranking Member Crapo (R-IN) discussed factors affecting decisions to invest in new housing, and asked how the current economic state can impact such investments. He asked how Congress can support housing affordability without contributing to inflationary pressures. Dr. Calabria cautioned about adding too many demand subsidies into the market that would run up prices. Senator Crapo asked Mr. Watson to explain specific recommendations to improve the LIHTC program, and Mr. Watson reiterated that baseline data evaluating the program is essential. Senator Crapo asked if there are recent tax proposals that have a negative impact on the supply of affordable housing. Ms. Geno noted that lowering the corporate tax rate could affect the use of the LIHTC. Ranking Member Crapo and Mr. Walker briefly discussed expanding the LIHTC student rule to improve administration of the credit.
Senator Debbie Stabenow (D-MI) discussed the move to remote work after the COVID-19 pandemic. She stated that it creates an opportunity for commercial buildings to be converted into mixed-use properties and asked Ms. Geno to discuss the challenges with converting office spaces into housing. Ms. Geno noted that zoning is often difficult, and also noted that the cost of construction to convert the commercial buildings to housing is often not affordable. Senator Stabenow and Ms. Scott discussed the connection between housing and jobs.
Senator Chuck Grassley (R-IA) stated that, at his request, the Government Accountability Office (GAO) issued two reports on the LIHTC, which noted that there was minimum oversight of the program and a lack of quality data – making it difficult to evaluate the efficiency and effectiveness of the program. He discussed the role of federal oversight with Ms. Geno. She noted that the states collect data and suggested that the federal government should work with state agencies to be sure that those data points are collected at the federal level either through the Internal Revenue Service or through HUD. She also referenced best practices at the state level for data collection and suggested following those could be an effective tool. Senator Grassley noted his concern that the LIHTC is often too focused on large urban structures, and Dr. Calabria stated that the program should set aside a certain amount of credit volume for smaller, more rural, properties. Senator Grassley and Mr. Watson discussed how a neutral cost recovery system could increase housing and lower costs.
Senator Ron Johnson (R-WI) questioned why the market could not allow for affordable housing to be developed. He stated that he is not a fan of using the tax code to socially and economically engineer. He discussed the increased costs of regulation with Dr. Calabria. Dr. Calabria noted that the cost of regulation is about 40 percent of the cost of development of multifamily housing. Senator Johnson suggested some regulations might be necessary but said that regulations drive up housing construction costs and the federal government offers relief from that increased burden by providing a tax credit. He suggested the federal government is a “dog chasing its tail.”
Senator Tom Carper (D-DE) stated his efforts to promote family housing in Delaware. He noted his support for engaging in bipartisan solutions to address affordable housing. He asked Ms. Scott and Ms. Geno to discuss where federal dollars will have the most impact, and both answered that there are many areas where federal dollars would be helpful. Ms. Scott noted the importance of the LIHTC, CDBG, and HOME programs. Ms. Geno stated that all markets are different and both subsidies and tax tools need to be available,
Senator Ben Cardin (D-MD) stated that the LIHTC is the “strongest tool we have to date” but said it is not enough. He noted the importance of preserving communities to maintain affordable housing that is “commensurate with the people that live in the community” and said the Neighborhood Homes Investment Act is “aimed at that.” Ms. Scott stated that the credit provided by the bill will enable construction of nearly 500,000 homes over a decade and will go a long way to improve conditions of affordable housing neighborhoods.
Senator Thom Tillis (R-NC) asked about balancing the approach of tax incentives as well as reducing the regulatory burdens. Dr. Calabria stated that the most important incentive for prospective builders is certainty that a project will eventually get approval for completion. Senator Tillis expressed concern about regulatory burdens and suggested that federal funding should go to jurisdictions that take a responsible approach with respect to regulations. Senator Tillis asked how to balance assistance between rural and urban areas. Mr. Watson suggested that a LIHTC set-aside for smaller unit structures could benefit rural areas.
Senator Maggie Hassan (D-NH) discussed housing supply concerns and asked how states can use a proposed middle-income housing tax credit to address workforce housing. Ms. Geno stated that the proposal would help expand housing options. Senator Hassan asked how best to make housing more affordable for rural communities. Ms. Scott said a basis boost for projects in rural and Native areas would help. Senator Hassan mentioned her bipartisan bill to provide tax cuts for middle-income homebuyers who use mortgage insurance. Ms. Scott said there are potential homebuyers who cannot afford a 20 percent down payment and therefore are required to purchase mortgage insurance. She noted that many cannot afford the premiums on the insurance and are prohibited from going forward with homeownership.
Senator Todd Young (R-IN) noted that the hearing is timely and important. He further stated that affordable housing provides a unique challenge that could be classified as a market failure. He said shining light on some of the government policies that distort markets and make housing out of reach for some people would be helpful. Senator Young noted his YIMBY legislation to require localities to make clear when they are implementing land use and zoning policies that drive up housing costs. Senator Young noted his partnership with Senator Cardin on the Neighborhood Homes Investment Act and stated it would not only increase affordable housing, but also jobs. He also noted the good work of the Terwilliger Center and its endorsement of the AHCIA.
Senator Maria Cantwell (D-WA) stated the importance of workforce housing to ensure that people can afford to live where the jobs are. She asked Mr. Walker to expand upon the impact of the expiration of the 2018 “bump” in LIHTC allocation. Mr. Walker noted that increasing production is essential, and said the LIHTC program is key to addressing affordable housing needs. He noted the 12.5 percent increase expired at a time when costs had gone up very quickly, and said many deals either cannot get off the ground or get completed without additional funding. In response to Senator Cantwell’s question about rural areas, Mr. Walker noted that rents are lower in rural areas but costs of materials are not much different, creating a challenge for developing in rural areas. Dr. Calabria noted that while the LIHTC is used in rural areas, the program is still heavily biased toward urban areas. He suggested that there should be a rural set- aside. Senator Cantwell asked if there is data that details how underbuilt affordable housing is and said the number would be helpful to show Congress how much supply has not been put in the system.
Senator Elizabeth Warren (D-MA) noted that for decades the country has under invested in housing supply and said the country is facing a shortage of as many as 7 million affordable homes. She discussed her concerns about the impact of institutional investors receiving tax breaks for buying housing stock and converting what little supply of affordable homes that remain. She noted that large REITs have bought up thousands of homes, and asked for Ms. Scott to discuss this. Ms. Scott noted that she is concerned with institutional investors extracting money by refinancing the real estate and then taking it out of the community rather than reinvesting it in the housing they purchase. She also expressed concern that the purchases present less opportunities for first time homebuyers.
Senator Sherrod Brown (D-OH) stated that it is difficult for first time homebuyers to find affordable homes. He asked how the Neighborhood Homes Investment Act would expand supply and open up homeownership opportunities. Ms. Scott said 500,000 new homes could be built over a decade and noted that the bill is targeted to census tracts that will assist low income families and minority families. Senator Brown discussed his legislation to ensure that students and veterans who have experienced homelessness are eligible to reside in LIHTC affordable housing. He noted that students that are not eligible for the LIHTC are forced to choose between full time status and housing. Mr. Walker noted that the AHCIA makes modifications to the student rule that will help address this.
Senator Catherine Cortez Masto (D-NV) discussed the Affordable Housing Bond Enhancement Act and how it would benefit communities. She noted it makes improvements to Mortgage Revenue Bonds (MRBs) and Mortgage Credit Certificates (MCCs). Mr. Walker stated that MRBs and MCCs provide a lower cost of borrowing and said her bill enhances these tools. Senator Cortez Masto asked Dr. Calabria about a review of the Federal Home Loan Bank System, expressing her concern about its very low investment in affordable housing. Dr. Calabria said a Federal Housing Finance Agency review of the System will be released soon that will make some recommendations for changes to the System and suggested that the Banking Committee should have some hearings. Senator Masto Cortez said financing for affordable housing requires putting together many pieces. She said the goal is to provide enough tools that are needed for financing and noted that the Federal Home Loan Bank System is an important part of that.
Senator Bob Menendez (D-NJ) discussed allowing property taxes to be fully deductible and said the state and local tax deduction has been critical in ensuring housing stays affordable. Ms. Geno said that dramatic increases in state and local taxes are an increasing problem that impedes multifamily developments. Senator Menendez stated his support for the LIHTC and said it has the potential do even more. He noted that developers need to obtain financing to start construction and asked about the role of Community Development Financial Institutions (CDFIs). Ms. Scott said CDFIs provide equity capital at the early stage of development when it is impossible to get pre-development funding to even start a project. She said CDFIs are lending and taking some of the biggest risks which helps get developers to the place where they can apply for LIHTCs. She also noted that CDFIs lend to developers that may not be able to secure conventional lending. Senator Menendez noted the important role of CDFIs in delivering affordable housing in underserved communities and urged his colleagues to support funding for CDFIs in the upcoming appropriations process.
The Housing Advisory Group is working with the AHCIA leads on reintroduction of the bill as well as with Chairman Wyden’s staff on the DASH Act. We want to recruit more Republican support on the Finance committee and look forward to working with you, our HAG members, to grow the cosponsorship of the affordable housing legislation. As a note, our Affordable Housing Forum in Washington, DC, cohosted with the AHTCC, will be May 17th followed by a day on the Hill (May 18th) advocating for the AHCIA. We hope you have this in your calendar and will sign up to attend once registration opens.