Affordable housing is something that everyone wants! But sadly, affordable housing is a pressing issue in many states, especially in urban areas where the demand for housing exceeds the supply. According to the World Bank, more than one billion people live in slums, and this number is expected to rise to 1.6 billion by 2030! Moreover, the housing sector accounts for about 40% of global energy consumption and 35% of greenhouse gas emissions, posing a serious environmental threat and threatening climate change.

How can we address these challenges and provide affordable, decent, and sustainable housing for all? One possible solution is to use tax credits as an incentive for developers and investors to build or renovate housing units that meet certain affordability and sustainability criteria. This article will explore what tax credits mean, how they work, the benefits and challenges of using them for affordable and sustainable housing, and some examples of successful tax credit programs worldwide. So, let’s dive in!

What Tax Credits Mean

Tax credits are subsidies that reduce a taxpayer’s tax owed to the government. By offering tax credits, the government can encourage the private sector to participate in providing public goods, such as affordable housing, without spending public funds directly.

How Tax Credits Work

Tax credits differ from tax deductions or exemptions, which reduce the amount of income subject to tax. Tax credits reduce the tax amount payable after the income is calculated. For example, if a taxpayer owes $10,000 in tax and receives a $2,000 tax credit, the final tax liability is $8,000. Tax credits can be of two types: refundable and non-refundable. Refundable tax credits can result in a negative tax liability, meaning that the taxpayer receives a payment from the government instead of paying tax. Non-refundable tax credits can only reduce the tax liability to zero, but not below.

Tax credits can be designed to target specific activities or outcomes, such as investing in renewable energy, hiring workers from disadvantaged groups, or providing affordable housing. The amount and duration of the tax credit can vary depending on the type and scale of the activity or outcome. For example, a tax credit for affordable housing can be based on the number of units, the rent level, the income of the tenants, the location of the property, and so on. The tax credit can be claimed either upfront or over some time, depending on the program’s structure.

Tax credits can be allocated either competitively or non-competitively, depending on their availability and demand. Competitive allocation means that the tax credit is awarded to the applicants who meet the eligibility criteria and offer the best value for money based on a scoring system or a bidding process. Non-competitive allocation means that the tax credit is awarded to any applicant who meets the eligibility criteria as long as enough tax credits are available. Competitive allocation can ensure a more efficient and effective use of the tax credit, but it can also increase the administrative costs and complexity of the program. Non-competitive allocation can simplify the application and approval process, but it can also result in oversupply or undersupply of the tax credit, depending on the market conditions.

Benefits of Using Tax Credits for Affordable and Sustainable Housing

Using tax credits for affordable and sustainable housing can have several benefits, such as:

Leveraging private capital:

Tax credits can attract private investors looking for tax benefits and stable returns. By offering tax credits, the government can leverage private capital to finance the construction or renovation of affordable and sustainable housing without spending public funds directly. This can increase the supply and quality of affordable and sustainable housing and reduce the fiscal burden on the government.

Promoting innovation and competition:

Tax credits can stimulate innovation and competition among developers and investors. To qualify for the tax credit, developers and investors must meet certain standards of affordability and sustainability. This can encourage the adoption of new technologies, designs, and practices that can improve the efficiency and performance of the housing sector. For example, tax credits can incentivize the use of renewable energy sources, green building materials, smart appliances, and other features that can reduce the environmental impact and operational costs of the housing units.

Enhancing social and economic outcomes: Tax credits can improve the social and economic outcomes of low and moderate-income households who live in affordable and sustainable housing units. By providing affordable and decent housing, tax credits can reduce the housing cost burden, improve health and well-being, and increase tenants’ access to education and employment opportunities. By providing sustainable housing, tax credits can also reduce the housing sector’s energy consumption and greenhouse gas emissions and contribute to the mitigation and adaptation of climate change.

Challenges of Using Tax Credits for Affordable and Sustainable Housing

Using tax credits for affordable and sustainable housing can also have some challenges, such as:

Complexity and uncertainty:

Tax credits can be complex for both the government and the private sector. The government has to design, implement, and monitor the tax credit program, which can involve multiple agencies, regulations, and procedures. The private sector has to comply with the eligibility and reporting requirements, which can vary depending on the type and duration of the tax credit. The availability and value of the tax credit can depend on market conditions and tax policies, which can change over time. This can create risks and uncertainties for developers and investors, who have to plan and finance their projects based on the expected tax benefits.

Trade-offs and opportunity costs:

Tax credits can involve trade-offs and opportunity costs, both for the government and the private sector. The government has to forego tax revenue that could be used for other public services or programs, such as health, education, or infrastructure. The private sector has to accept lower profits or higher risks than they would otherwise in exchange for the tax benefits. Tax credits can distort market signals and create inefficiencies or inequities in the allocation of resources. For example, depending on the demand and supply of the tax credit, tax credits can favor certain types of housing or locations over others or create an oversupply or undersupply of affordable and sustainable housing.

Conclusion

Tax credits are powerful tools for fostering affordable and sustainable housing. They can leverage private capital, promote innovation and competition, and enhance social and economic outcomes. However, tax credits also pose challenges, such as complexity, uncertainty, trade-offs, and opportunity costs. Therefore, tax credits must be carefully designed and implemented, considering each state and program’s specific context and objectives. And that’s where we, Fallbrook Financial Services, come in! A leading financial solutions provider for the housing sector, we have the experience and expertise to help you with tax credit programs and other financing options. 

Fallbrook Financial Services works nationwide, serving both business and individual clients. At Fallbrook, we aim to create value and a positive impact on our clients, partners, communities, and environment. CONTACT US today for affordable and sustainable housing.