City and state governments fear $10 billion loss from tax breaks for rental housing

U.S. cities and counties are concerned they will lose more than $10 billion in annual rental housing tax revenue — a loss that has been predicted for decades — because of one action Congress took last week.

The compromise budget deal, which was approved by Congress last week, extends through 2021 the tax break offered by the 1985 Housing Act. In that law, the federal government allowed states and localities to keep excess rental housing tax revenues by drawing down tax credits from the federal government. (By extension, this is called tax breaks for rental housing.) The law expired in 2017.

The federal government has extended the tax breaks for both rental housing and for subsidized housing, called Section 8 Housing Choice Vouchers, often referred to as Section 8 because the government pays the rent. Now those tax breaks will be extended until 2021, rather than falling off the books after September 30, 2019, as had been originally scheduled.

The new tax break extension could wipe out a lot of resources for cities and counties, who rely on rental housing taxes to balance their budgets. That amount varies widely from state to state, depending on how affordable the housing is — or isn’t — for low-income people.

By 2050, 31 million households will need housing, and the country will be ranked third in rental affordability by a new analysis from the Century Foundation. That means that there will be a need for 6 million additional affordable rental units, the foundation estimates.

States and cities have taken to the courts over the past few years to try to have the government create a temporary fix to a potentially abrupt decline in federal rental housing tax revenues, so they do not lose that revenue. A 2013 Kansas Supreme Court ruling struck down a state law in favor of allowing revenue to flow to cities and counties who didn’t lose their funds entirely.

But court challenges against the federal government haven’t gone away. A federal judge in Missouri recently gave the OK for the federal government to create a permanent fix for the issue.

Ohio, New York, California, Arizona, Hawaii, Wisconsin, and New Mexico have filed suit, too. The cities of Dayton and Cincinnati have also sued over the issue. The government, though, has so far been successful in blocking cities and counties from filing suits.

However, there may be a silver lining for local governments. In the midst of a tax cut proposal put forward by the Republican leadership of the House, the nonpartisan Joint Committee on Taxation found that increasing the amount of affordable housing tax credits could produce $10 billion in additional rental tax revenue in the United States by 2027. States and localities now need to wait to see if the tax reform bill will allow the existing tax credits to be extended.

The levy expires in 2022, but the extension itself is set to expire at the end of 2021. That means states and localities are in the process of finding new ways to finance affordable housing.

State and local governments, as a result, may only lose access to the tax money if they can come up with new ways to fund the construction of the affordable housing units they intend to build.

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