Property Tax Incentives For Housing Benefit Renters And Taxpayers

Housing prices and rents go up with demand surges and supply doesn’t keep up. But there are nuances in what causes producers of housing to act, assuming the costs and risks of building new housing. The nature of the politics around housing complicates this significantly, with some believing that unless housing producers are somehow leaned on, they won’t build housing for people at lower levels of income. This has resulted in mandates, like Mandatory Inclusionary Zoning (MIZ), which I have likened to a bribery scheme in which people building housing are forced into paying fees to get their permits, and then those fees converted into subsidies for large non-profit developers. A recent report shows that incentives to produce rent restricted housing are far more effective, even in Seattle, its mandatory inclusionary scheme.

First, it’s important to note that all new housing added in a housing market is ameliorative of price increases and overall inflation. Even new, more expensive units create options for people with more money to spend, and that means they won’t compete for housing products against people with less money to spend. If regulation allows, producers will respond to demand, even in those lower rated products. For example, when the housing economy began to recover after the 2008 crash, in markets like Seattle, there were many regular sized apartments being built but there were also microunits being built too. These smaller units in prime neighborhoods were cheaper even while other housing was more expensive.

Still, policy makers aren’t happy when they look at the sticker price on new housing, often dismissing what one expert called, the “skew of the new;” like a new pair of shoes or a new car, newly constructed housing is often more expensive than existing housing. There is a temptation to force housing developers and builders to include rent restricted units in their apartment buildings. The reasoning is that when the market is hot, and demand is surging, these developers will make lots of profit, and some of that should be returned to the public in the form of some housing that is cheaper.

There are flaws in this thinking, but when comparing forcing the inclusion or incentivizing it, I favor the incentives. More importantly, meeting the needs of people with lower levels of incomes is more effective in market rate construction which obviates the investment in land, construction, and operation. In other words, if we’re worried that new housing ought to include some housing with lower priced units, it’s better to encourage this with incentives.

How does this work? The best example I’ve found are programs that offer a reduction in property taxes in exchange for inclusion of rent restricted units. And of those sorts of programs, the one I highlight most often is from Washington State, the Multifamily Tax Exemption (MFTE) Program. A few years ago, I ran a comparison between the performance of Seattle’s MIZ, the Mandatory Housing Affordability program and Seattle’s MFTE program. At that time, MFTE had creates some 8,000 rent restricted units at far less cost than MHA’s 800 units.

The MFTE program exempts private, market rate housing from property tax on the improvements from the new construction. The savings to the project is significant enough to motivate lots of participation from private developers. In exchange for the tax break, the project has to include rent restricted housing at rate of 20% or 20 out of every 100 units. In Seattle, the deal lasts for 12 years and could last for as long as 20, promising affordable housing at levels of income from 40% to 80%.

The most recent report from the University of Washington validated the efficiency of the program. According to the most recent measurements, the program created “7,047 income restricted units” with 6,600 units still in the program.

The study also factors in the idea that there was a total of 33,956 units created in the 303 participating projects. The value here is easy to see; had there been no incentive, those projects might not have been feasible at all. Finally, the program cost $35 million in forgone tax revenue, the price of one 70-unit LIHTC building in the City. The taxpayers won big time with this program as well, paying just under $5,000 per unit. The numbers don’t exactly line up with previous reports, but the fact remains that with the incentive, taxpayers and renters win big and so do developers whose projects work better with a smaller tax burden. It’s a principle and math that ought to persuade policy makers everywhere who are wondering how to create more affordable housing.