Housing Tax Credit May Be
Answer for New Orleans

As the rebuilding effort in the Gulf Coast begins to take shape, there is growing talk in Washington and in real-estate finance circles about funding the massive undertaking by sharply expanding the federal tax-credit program that has produced much of the nation's low-income housing during the past two decades. The risk, some housing experts say, is that the tax credits will produce more lower Ninth Wards, with dense concentrations of poverty that put residents on a downward economic spiral.

A group, known as Affordable Housing Tax Credit Coalition, is asking Congress to increase the tax credits for states hit by Hurricane Katrina by at least a hundredfold in the hardest-hit areas.

The tax credits have successfully funded much of the low-income housing built in the U.S. since they were enacted in 1986. The program works like this: The federal government allocates a certain number of the tax credits to states based on population. The states dole out the credits to developers of low-income housing. The credits are then sold to investors -- often banks and major corporations looking to reduce their federal income taxes. The money generated by the sale of the tax credits generates upfront equity for the construction project.

One proposal by the Tax Credit Coalition could cost as much as $1.2 billion to $1.3 billion annually over 10 years to fully fund the replacement of 100,000 affordable rental units that were lost in Louisiana alone, says Marc Schnitzer, a tax-credit coalition member and president of CharterMac, which helps structure financing for many low-income construction projects. Some of that money would be kept in reserve to subsidize operating costs for the properties, because the rental market is likely to remain uncertain in the hurricane-affected areas for some time.

An expansion of that magnitude would dwarf previous tax-credit allocations. Consider that Louisiana received about $8.6 million in tax credits and produced about 1,000 rental units in 2004, while Mississippi received $5.3 million and produced 743 units, according to the National Council of State Housing Agencies.

Bruce Katz, who directs the Metropolitan Policy Program at the Brookings Institution in Washington, says that while tax credits would help, they could cause concentrations of low-income housing, producing neighborhoods like the lower Ninth Ward in New Orleans, the pocket of impoverished housing flooded by the hurricane.

A former chief of staff at the Department of Housing and Urban Development during the Clinton administration, Mr. Katz says that federal subsidies should also support rental housing for more moderate-income residents and support single-family houses.

The low-income tax credits subsidize rental housing for tenants who earn no more than 60% of the area's median income, which in New Orleans is relatively low. In the 1990s, New Orleans ranked second among the nation's large cities for locating tax-credit housing in extremely poor neighborhoods, according to the Brookings Institution. Mr. Katz says this may have exacerbated and concentrated the poverty in certain neighborhoods.

The key to breaking what Mr. Katz calls "enclaves of poverty" could be subsidizing housing for a mix of income levels, and making sure that the low-income credits support housing that would be built in mixed-income neighborhoods. That would lead to better schools and access to jobs. "Let's not repeat the mistakes of the past."

Congress is considering a range of subsidies that could help the Gulf Coast, including a homeownership tax credit and money for low-interest mortgages. One proposal would expand the rental-housing tax credit to more moderate-income residents. The looming cost of the reconstruction is giving many lawmakers pause, however, and it isn't clear which plans will win approval.

Mr. Schnitzer says that without the subsidy, it would be difficult to privately finance housing in the disaster area, because the market is so uncertain. It remains unclear how many displaced residents will eventually return to the region.

"If you were just looking to the private sector, you are going to have people building luxury condos on the Gulf Coast where they will make money. They will not be building affordable housing without the benefit of the tax credits," says Mr. Schnitzer, whose company has invested in more than $7 billion in tax-credit developments since 1987.

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