A congressional subcommittee is considering tightening the regulations for tax-exempt financing for construction of rental housing or eliminating the program because of concern that it may have provided a subsidy for the wrong group of people.
Local housing finance agencies in many U.S. communities increasingly are taking advantage of their authority to float tax-exempt bonds to finance construction or rehabilitation of apartments. Recent studies indicate that developers are using tax-exempt financing for nearly one-quarter of all apartment projects as the volume of such funds for housing has increased from $2.2 billion in 1980 to $5 billion in 1984.
Recognizing that the use of tax-exempt funds provides a subsidy to developers in the form of lower interest rates, Congress voted in 1980 to include a requirement that developers using the funds set aside 20 percent of the units in their projects for low- and moderate-income tenants.
Witnesses testified before the oversight subcommittee of the Ways and Means Committee last week, however, that the subsidy generally benefits higher-income renters rather than low- and moderate-income tenants, and that in some cases higher-income renters have displaced low-income people despite the federal regulations for set-aside units.
Although one developer testified that tax-exempt financing for housing is the only remaining subsidy for the production of low- and moderate-income housing and therefore should be continued, other witnesses said that the program benefits young, wealthier people more often than it benefits low- and moderate-income families.
The program costs the federal government $1 billion in lost taxes for every $5 billion worth of tax-exempt bonds, according a General Accounting Office study for the Joint Committee on Taxation.
"The average income of all tenants in these projects was about $24,000, compared with a national average renter income of about $14,000," said GAO Deputy Director Ralph V. Carlone. "The average income of the low- and moderate-income tenants in the projects we visited was about $15,000, or about twice the income of tenants assisted by other federal rental housing programs."
Under current IRS regulations, 20 percent of the units in a project financed with tax-exempt bonds must be rented to families that make 80 percent or less of the median income for the area, at rental rates that are 30 percent of their income.
However, the regulation makes no provision for different family sizes. Therefore, a single person and a family of four qualify as low income at the same income level, even though the single person has more disposable income and can use a smaller apartment.
In an area with a high median income, such as Washington, rents for set-aside units in projects financed with tax-exempt bonds can be surprisingly high and still meet the requirements of the IRS regulations.
William Peak, executive director of Downtown and Specialized Ministries, told the subcommittee that a proposed rehabilitation of 1,000 apartments in the Arlandria West area of Alexandria with tax-exempt funds was expected to displace up to 3,000 low-income tenants.
"Currently, the average one-bedroom apartment in Arlandria West rents for $343 a month," but rents will be raised to $454 for the set-aside units and to $539 for the other units after the rehabilitation, Peak told the subcommittee.
"Poor people cannot afford $454 a month, much less $539," Peak said. "Regardless of whose definition of 'low income' you use, by no stretch of the imagination can one claim that the tax-exempt financing being offered to redevelop the Arlandria West neighborhood is going to provide housing for low-income people."
GAO officials passed around copies of brochures from projects renovated with tax-exempt financing, including several that featured expensive amenities such as swimming pools, saunas and exercise rooms.
Rep. J. J. Pickle (D-Tex.), chairman of the oversight subcommittee, said the brochures were "disturbing."
"It is unclear whether these multifamily housing provisions are still appropriately targeted and otherwise operating as the Congress intended," Pickle said. "We hope we can make some corrections or changes in the programs. These brochures raise the question of doing away with the program all together."
Mikel M. Rollyson, tax legislative council for the Treasury Department, told the subcommittee that the IRS soon would propose revising the regulations for the set-aside units so that local housing finance agencies would be required to adjust the income levels for people qualifying for the units according to family size, as the Department of Housing and Urban Development does for its housing subsidy programs.
Major F. Riddick Jr., director of housing and community development for Prince George's County, told the subcommittee that the Prince George's housing authority adjusts the qualifying incomes according to family size and that "judicious" use of the funds has helped the county rehabilitate more than 13,000 units of its aging rental housing stock.
"We feel that, in the long run, this will result in a transformation of communities as well as an improvement in the quality of life for our citizens," Riddick said. "We . . . encourage the Congress to maintain this important program."