New Tax Credit Regs Make Progress, More to be Done

The California Housing Partnership Supports State Efforts to Increase Access to Opportunity for Low-Income Families, but Funding Regulations Must Reflect Cost Premium Developers Face in Higher Resource Areas.

Low-income families in California, particularly those of color, have for decades faced a landscape of constrained choice when it comes to finding a place to live. Discriminatory policies and land use decisions have restricted these families’ access to high-resource areas that are most supportive of child development and offer them the best chance at moving up the economic ladder.

These patterns have become entrenched in recent years. Since 2000, concentrated poverty has risen dramatically across the state, and our coastal cities have steadily become some of the most economically segregated places in the country. People of color also continue to shoulder the burden of exposure to the risks of living in areas of concentrated poverty; most poor African-Americans and Hispanics in California live in high-poverty neighborhoods, but most poor whites do not. A large body of evidence on the impact of neighborhoods on educational, economic, and health outcomes suggest these trends threaten to exacerbate racial and economic inequality in our state.

In this context, the California Housing Partnership applauds the intent of State leaders at the Tax Credit Allocation Committee (TCAC) and the Department of Housing and Community Development (HCD) in proposing concerted steps to increase access to opportunity for low-income families with children, and to counteract historic patterns of segregation and concentrated poverty.

Yesterday, TCAC released a proposed set of new regulations to incentivize development of family-targeted new construction development using 9% Low Income Housing Tax Credits (LIHTCs) in “high” and “highest” resource areas, as defined by new regional opportunity maps whose creation TCAC and HCD oversaw over the past six months. As a participant in the task force that developed the maps, I worked hard on behalf of the California Housing Partnership to ensure that they were based on the strongest available evidence—and that opportunity would be defined regionally, accounting for local context to the greatest degree possible.

Both the maps and the proposed regulations will require additional adjustments in order to be as effective as possible in incentivizing developers to site new construction family housing in neighborhoods most supportive of child development and economic mobility. For example, the maps do not identify lowest resource areas which may become higher resource over time due to gentrification, and they may need refinement in regard to rural areas.

In addition, while the California Housing Partnership lauds the initial steps TCAC has taken toward creating new incentives for developing more new construction family housing in higher resource areas (as proposed by our partners at NPH, SCANPH and the San Diego Housing Federation with whom we worked closely), it is critical that regulations to support the financial feasibility of developments in higher resource areas—such as threshold basis limit (TBL) boosts—reflect a more realistic estimate of the cost premium that developers incur when creating affordable homes in these areas. Using cost certification data from the last 15 years of place-in-service filings for more than 450 large-family, new construction, 9% credit developments, we found that total development costs in “high” and “highest” resource areas are proportionally higher, in certain regions, than accounted for in TCAC’s proposed TBL boosts of 10% and 5% for developments in “highest” and “high” resource areas, respectively. The results of our analysis are shown below.[1]

We believe increasing TBLs in a way that is proportional to the cost premiums developers of new construction family housing face in higher resource areas is a small price to pay for the $100,000 per-child lifetime earnings increase in real dollars that result from families moving to higher resource areas,[2] along with improved educational outcomes, substantial (and cost-saving) reductions in diabetes and extreme obesity for adults, and clinical-level reductions in psychological distress and major depression for both adults and young girls.[3]

Moving forward, it will be important for the State to balance creating more affordable homes in higher resource areas with making comprehensive investments in lower resource neighborhoods which desperately need them, and preventing displacement from lower resource areas that may become higher resource over time due to gentrification. But the need for action is clear: according to the opportunity maps, 62 percent of affordable homes in large-family new construction developments that have received 9% tax credit allocations since 2003 have been located in “lowest” resource areas—meaning the poorest and most racially segregated neighborhoods in the state[4]—and only seven percent of these homes have been located in “highest” resource areas. We can and should do more to provide a balanced set of choices to low-income families, but we also need to get the incentives right.

[1] Special thanks to Lindsay Rosenfeld for completing this analysis, and to Steven Almazan, and Lindsey Freeland, and Hayley Raetz for their contributions when this project began in spring 2017. All are second year Master of Public Policy students at the UC Berkeley Goldman School of Public Policy.

[2] Chetty, Hendren, and Katz. 2015. The Effects of Exposure to Better Neighborhoods on Children: New Evidence from the Moving to Opportunity Experiment. The Equality of Opportunity Project. May.

[3] Sanbonmatsu, et al. 2011. Moving to Opportunity for Fair Housing Demonstration Program: Final Impacts Evaluation. Prepared for: U.S. Department of Housing and Urban Development, Office of Policy Development & Research. November.

[4] This concentration of development in lowest resource areas is partly a result of State and local policies and funding decisions that encouraged it.