Here is what the HUD.GOV website says about the status of low-income housing in America: “Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care. An estimated 12 million renter and homeowner households now pay more than 50 percent of their annual incomes for housing. A family with one full-time worker earning the minimum wage cannot afford the local fair-market rent for a two-bedroom apartment anywhere in the United States.”
This amounts to a significant number of people for whom the existing market-based housing solution simply doesn’t work. For a long time, the federal government has been trying, in various ways and with evolving strategies, to help these citizens be housed. What has evolved to become the predominant current strategy is something called “Low Income Housing Tax Credits” (affectionately referred to as “Lie-Techs.”)
From the perspective of modern fiat currency, Lie-Techs, I think, are extremely interesting and revealing of our utter confusion about money. They basically work like this:
Each year the federal government declares a certain dollar value of tax credits (a dollar for dollar cancellation of taxes due) and distributes them to the states. The state housing authorities make these federal tax credits available to regional housing developers who bid for the tax credits by submitting proposals to build specific multi-family rental housing projects. To obtain the tax credits, the developers have to agree, basically, to rent the housing units they create to citizens below stipulated income thresholds—and further agree to charge them a maximum rent that is below a stipulated percentage of their income. These rental parameters must be maintained for a 30 year period.
Next, the developers form an LLC partnership with investors—usually corporations with significant federal tax burdens. The structure of the LLC is that the corporate investors make a “capital contribution” to the partnership (cash—which is used to pay for the building of the housing project) and receive, in return, 99.9% of the tax credits allocated to the project, plus profits and depreciation write-offs. The capital contribution investors make is typically 75-85% of the value of the tax credits, which are then distributed to the investors over a 10 year period. Consequently, in each of those years the investor extinguishes a dollars’ worth of federal taxes for only 75-85 cents, putting him ahead of where he otherwise would have been. In addition, the investor is able to take a depreciation write-off of the housing facility itself, reducing tax burdens further. Overall, as an investment, this amounts to a 20-30% annual return.
Somehow this “process” makes it appear that private investors are financing affordable housing. Even Wikipedia explains that the Lie-Tech program “has leveraged more than $75 billion in private equity investment for the creation of affordable rental housing.” When you think about it, however, it’s actually the other way around: Affordable housing has leveraged more than $100 billion in tax credits for American corporations.
What’s really interesting is the implicit notion that there is a distinction between a tax credit and a dollar. The suggested difference seems to be that a tax credit is something the federal government has lots of because it doesn’t have to collect or borrow them from the American people. Dollars, on the other hand are something the federal government has few of because the only way, apparently, it can get those is by collecting taxes or borrowing from the private sector. So the idea of corralling the private sector into spending its dollars to build affordable housing in exchange for something the federal government doesn’t have to collect or borrow seems like a really neat trick.
But if you understand modern fiat money, you understand the absurdity of this trick: To avoid the appearance that sovereign spending should be used to pay for affordable housing, the federal government “spends” a dollar’s worth of tax credits to obtain 75 cents worth of housing. If the charade of appearances could be lifted, the federal government could be spending a dollar’s worth of fiat dollars to obtain a whole dollar’s worth of housing.
To lift the charade, all you have to visualize is the simple fact that there is no difference or distinction to be made between a tax credit and a U.S. dollar. A U.S. dollar, in fact, literally is a tax credit and nothing else. Other than being a unit of exchange in the general economy, a U.S. dollar has no intrinsic value other than the fact that it is the only thing a U.S. citizen can use to extinguish a dollar’s worth of tax liabilities.
So what does the charade cost us? I guess if you do the math, it costs us the 25% of the affordable housing we could have been creating, and could be creating going forward. But there are other costs as well. For one thing, the complexity and multiplicity of “deals” that have to be calculated, negotiated and recorded to make a Lie-Tech project produce an actual apartment that a real single-mom can afford to rent—that multiplicity of complexities means that a significant part of the funds going into a Lie-Tech project don’t create livable floor-space but, instead, pay the fees of accountants and lawyers. If your goal is to create income for accountants and lawyers—or just create income in the private sector in general—then it doesn’t matter. But if your stated goal is to create affordable apartment spaces, then you’re wasting a good chunk of the dollars Congress appropriates .
Another cost lies in the fact that after 30 years, the investors, who have already made a 20-30% return on their capital contribution, own a piece of real-estate that can now be rented out at market rates—which means the value of their asset goes up substantially, while the number of available affordable housing units declines. Over time, then, new Lie-Tech projects that come on line begin merely to replace old Lie-Tech projects which are converting to market rates. If sovereign spending simply built the affordable housing in the first place, not only would there be more of it (for the same amount of investment) but it could remain affordable for the lifetime of the structures (sixty years or more, assuming they were reasonably well built in the first place).
Finally, if modern fiat currency was properly understood and embraced, it would be possible to imagine a way to create an actual affordable housing market—in which the house-products bought, sold, and rented would themselves be affordable rather than subsidized—a market which low-income wage earners, themselves, could participate in as entrepreneurs, builders, and owners. I hope to explore this possibility in future posts.