One year after its birth, the national housing program ballyhooed as the only big real-estate tax-shelter game left for small-scale investors is missing a key ingredient: players willing to sit at the table, plunk down their cash and wait for the writeoffs.
That's the conclusion reached by a 50-state study of Congress' ambitious 1987 tax-credit program. The plan was designed to link middle- and upper-income families with lower-income households via creative tax policy.
Since you may be one of the thousands of people Congress targeted as a potential player, or beneficiary, you might be interested to hear what's been happening the past year. And why you probably never even heard of the tax-credit program in the first place, much less lined up for it with dollars in hand.
When Congress enacted the Tax Reform Act of 1986, it simultaneously ended every form of tax and financing incentive for investment in rental housing. It also gave owners of such property the tax-code equivalent of a 12-month migraine: a "passive activity" income-and-loss system that prohibits them from deducting out-of-pocket losses on real estate.
Tax reformers recognized that this would cut deeply into the rate of construction of rental apartments in every income sector. But they didn't want to hurt what they saw as the most economically vulnerable slice of the market -- lower- and moderate-income households.
So Congress created a special tax-credit program that would have an ingenious double edge to it. On the one hand, it would spur new construction and rehabilitation of apartment complexes for families in need of decent, affordable shelter.
On the other hand (and this was to be the cleverest tax-policy aspect of the scheme), the new program would not reward the people who traditionally had invested in low-income housing: fat cats with incomes of $250,000 and up, hunting for tax shelter.
Rich doctors, rich lawyers, rich business executives would simply be cut out of the deal, and good riddance.
Instead, said Congress, the new and improved program would aim at people who'd never had such fun: middle- and upper-middle-income families who had a few extra bucks -- $5,000, $10,000 or more -- and would jump at the chance to play the only tax-shelter game left in town.
The shelter itself would be in a form they'd particularly appreciate: actual credits against their earned income, not mere deductions. Credits are far more valuable than deductions, since they can be subtracted, dollar-for-dollar, from the bottom line of your federal tax bill.
Deductions, by contrast, cut only a fractional dollar-for-dollar, and a diminishing fraction at that. If you've got $10,000 in federal taxes due next April 15, but you've also got $10,000 in tax credits in your pocket, you owe Uncle Sam nothing for the year.
Ten thousand dollars worth of tax deductions, however, would keep you on the debit side: With deductions, you have to multiply your tax bill by your federal tax rate.
Say that 38 1/2 percent is your rate for tax year 1987. As a result, your $10,000 deduction would net you only $3,850 worth of tax savings, leaving you $6,150 in the hole to Washington. Next year, when your top rate on earned income is just 28 percent, the deduction would be worth even less.
To get housing built or renovated by the "right" people for the "right" people, tax reformers cooked up the following: In 1987, investors can qualify for tax credits of either 9 percent or 4 percent, depending on various factors. Developments that qualified for 9 percent credits would allow their investors to subtract prorated shares of 9 percent of the project's costs from their personal tax bills each year for the coming decade.
Generally, said Congress, investors would merely have to have annual incomes of $200,000 or below to pick up the full value of the credit.
So what's happened? Researchers from Harvard and Massachusetts Institute of Technology's Joint Center for Housing Studies conducted the first nationwide investigation of the program, and delivered it to the National Council of State Housing Agencies last week.
Even factoring out the customary bureaucratic lag time for any start-up program, Congress' answer to the low-income housing problem is off to an abysmal start.
Less than 16 percent of the $305 million first-year credit authority has been applied for, and some of that could even fall out of the pipeline.
Developers are repelled by the program's stringent income-targeting requirements, tax-regulation uncertainties and lack of ancillary financing support from other federal programs. Individual investors either haven't heard of the scheme at all or aren't willing to put their cash at risk for a tax credit that more typically turns out to be 4 percent, not 9 percent.
If investors won't invest and developers won't build, it could be a cold decade for ill-housed Americans looking to Washington for a roof over their heads.