It's already hard to build affordable housing in the US, and infrastructure here is unusually expensive. The proposed GOP tax plan would exacerbate those problems by increasing taxes on the bond programs that typically pay for them.
Among the many tax breaks eliminated in the tax-law reform proposal unveiled in the House of Representatives on November 2 is one that would have a huge impact on how large new public and private facilities are financed and built around greater Washington.
The tax increases would likely result in borrowing at higher interest rates, thereby making these projects more expensive and causing fewer to be built at all.
Municipal bonds aren't just used by municipalities
The proposal eliminates the federal tax exemption on Private Activity Bonds (PABs). These are a variety of municipal bonds where more than 10 percent of the proceeds go to “private activities”–non-governmental entities that are socially valuable, but don't serve the entire population. (The relevant IRS rule is Publication 4078.)
Because the interest paid on municipal bonds is tax-exempt, the investors who buy municipals are willing to accept lower interest rates. At the end of the day, a bond paying 10 percent but subject to a 40 percent tax pays the same as a tax-exempt bond yielding six percent. PABs have lower interest rates and longer funding terms than other sources of financing like bank loans, so they're particularly useful for big construction projects.
One downside of PABs is that setting up a bond issuance involves a whole lot of paperwork, a one-time cost that's easily shouldered by a large project but can be a huge burden for a smaller project. Another downside is that each state or District has a limit on the amount of PABs that they can issue in any given year. PABs make up 15-20 percent of the total municipals market.
Needless to say, many trade associations in the industry are upset about eliminating PABs. The Bond Buyer quoted Sandy MacLennan, president of the National Association of Bond Lawyers, as saying, “Many people might not realize that this would include bonds for airport projects, affordable and low-income housing, nonprofit hospitals and nonprofit colleges and universities.”
Senator Richard Blumenthal (D-CT) said, “I’m very skeptical about that kind of change in the tax code that discourages infrastructure building at a time when we desperately need to repair and reconstruct and build anew our ports, airports, a lot of facilities that are supported by that kind of financing.”
As with other tax-law changes, the market for municipal bonds would also be hit by lower marginal tax rates. Nearly 75 percent of municipal bonds are owned by individuals, many of whom are in the top tax brackets. If marginal tax rates decline, the value of a tax exemption also declines.
Here's how mixed-income apartments would be impacted
The largest issuer of PABs in DC is the DC Housing Finance Authority's Multifamily Mortgage Revenue Bond (MMRB) program, which lends to developers who build or renovate large mixed-income apartment developments. These are sometimes called “80/20 deals” because up to 80 percent of the apartments can be market rate, but at least 20 percent of the apartments must be affordable at 50 percent of area median income.
Besides the lower interest rate, MMRBs also automatically generate a four percent Low Income Housing Tax Credit (LIHTC) that developers can use as part of the down payment on their loan. (Read more about how LIHTC works.)
The four percent LIHTC is less than the nine percent LIHTC–but it's easier to use, because there's huge demand and a long waiting list for nine percent credits. Rick Goldstein, counsel to the Affordable Housing Tax Credit Coalition, estimates that half of all LIHTC assisted housing is built with PABs.
In DC, local money from the Housing Production Trust Fund often helps to make up the difference between what the four percent and nine percent credits would pay out. For projects that do receive nine percent tax credits, MMRB proceeds often provide the mortgage financing.
Over the past three fiscal years, DCHFA has issued over $660 million in MMRBs, which built or renovated 4,423 apartments across DC.
MMRBs are particularly useful for many types of apartment transactions common in DC, such as the many large apartment buildings under development, tenants exercising TOPA rights or local nonprofits who might not qualify for conventional loans, or developers who realize that going a bit above their inclusionary zoning requirement can pay off with advantageous financing. Most of the new multifamily construction in Wards 7 and 8 and at public housing redevelopment sites is financed with MMRBs.
The House proposal would eliminate both the tax exemption on multifamily PABs, and the four percent LIHTC.
Infrastructure and institutional developments
Many other “private activities” currently qualify for PABs. Some of these are perhaps of dubious public purpose, including stadiums and commercial developments. These bonds are issued under the auspices of local governments, via entities like the Maryland Economic Development Corporation or the Arlington County Industrial Development Authority.
Transportation infrastructure projects frequently use PABs for financing. The public-private partnerships that have recently been put in charge of many of this region's surface transportation improvements, including Virginia's HOT lanes and Maryland's Purple Line, also have issued, or been allocated, PABs directly by the US Department of Transportation.
Rail improvement projects like Florida's high speed rail line and the New York's new Moynihan Station have used these, and it was similarly expected that PABs could pay for the redevelopment of Washington Union Station.
The Metropolitan Washington Airports Authority's airport bonds, which have paid for projects like the Aerotrain at Dulles and National Airport's new concourse are considered PABs because they're repaid by rents and fees charged to airlines and shops.
Nonprofit institutions often use tax-exempt revenue bonds to finance new buildings. Some of these include the new Spy Museum building at L'Enfant Plaza, offices for National Public Radio, UNCF, the World Wildlife Fund, faculty housing at George Mason University (via the university's nonprofit endowment), classrooms at Catholic and Howard, and additions to Inova Fairfax Hospital and Children's National Medical Center.
No more refinancing
Just like homeowners refinancing a mortgage, sometimes municipalities want to take advantage of lower interest rates to refinance their bonds, or maybe to change the terms on their existing bond financing.
They can do so (but just once!) by issuing new “advance refunding bonds,” with the proceeds going to repay the older, higher-interest bonds. The tax proposal would eliminate this provision.