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Every legislative session, lawmakers are duped by rosy tax credit programs, sold as either robust jobs programs or silver bullets to our social woes.

This year HB2365, sponsored by Representative Ben Toma, is being sold as both.  The Low-Income Housing Tax Credit (LIHTC) program is a federal program by which qualified investors are incentivized to build housing projects for low-income persons with generous income tax subsidies.

How it works.

It is a sweetheart deal for banks, insurance companies and investors.  The Arizona program allows for $12 Million a year of tax credits that can be matched with the subsidies offered through the federal program.  The bills mirror the federal LIHTC percentages and can be carried over for 10 years.

To illustrate the business model, a $10 Million project qualifies for 9 percent tax credits.  That is $900,000 a year and $9 Million over the course of the 10 year carry forward period.  Banks sell these credits to other investors who make up a pool to finance the project.  Some projects are even able to bridge financing gaps with other government programs. But not only are almost the entire project costs subsidized by the taxpayer, another $2.2 Million is generated through tax write offs from real estate losses, depreciation and interest expenses.

This mechanism is supported by many layers of middlemen who add to the cost of building these projects.  As a result, the program is lucrative for investors, and very costly for the taxpayers.

How it actually doesn’t work.

For several years now, this program has been sharply scrutinized by various parties including the Office of Government Accountability (OGA), think tanks, and the media.

The overarching theme: this is a costly and inefficient program, susceptible to fraud and dubious in its impacts to shelter low-income Americans.

Much of the gamesmanship of the program revolves around the submittal of construction costs which the OGA determined varied drastically from state to state and project to project.

The average LIHTC project cost $218,000, yet only $9,400 of it was the cost of the land; a ratio observably out of whack. This is par for the course for a program which in the past has been scandalized by construction kick-back schemes.  The program has been gamed in other ways.  Just last Fall, Wells Fargo made an over $2 Billion settlement with the Department of Justice for nation-wide collusion to devalue the tax credits.  Hundreds of millions of dollars have been siphoned from the program in these ways resulting in far fewer units being built for the poor at a great cost to taxpayers.

Neither at the state nor federal level, did necessary oversight exist to ferret out inflated budget projections and fraud.  In fact, only seven of the 56 agencies around the country awarding these credits has been audited in the program’s 30-year history.

And yet the feds continue to soak increasing dollars into the program each year, though the actual number of units being constructed dwindles.  According to an investigation conducted by NPR, the $9 Billion LIHTC program is producing fewer units than it did 20 years ago yet taxpayers are paying 66 percent more in tax credits.  Aside from the fraud, another factor likely being the many syndicators, consultants, and financiers that work in their margins into the complicated process.

What else this reveals.

The OGA’s report on the vast cost variations in building state to state, reveal another critically important truth.  Jurisdictions with onerous and restrictive land use regulations drive the high costs to build there.  These incentive programs in fact reward states that cause their own affordable housing crises and fleece taxpayers all at the same time.  A report issued by the National Association of Homebuilders and the National Multifamily Housing Council estimated that 32 percent of multifamily costs were attributable to regulation.

In fact, studies of housing prices have shown costs have directly increased with land use regulations.  As a result, federal housing affordability spending is almost two times higher in the most regulated states than the least regulated states.

 

There are better ways.

It is long-time policymakers address affordable housing for American families by addressing the root of the problem and tailoring assistance programs that serve those in poverty, not only those seeking a profit.

Under the new federal administration, director of Housing and Urban Development (HUD) Ben Carson, has looked to do just that.  Instead of continuing to reward bad behavior by local governments, his agency has discussed attaching HUD grants to regulatory reforms proven to lower housing costs.  HUD’s position that they won’t continue to aid in the affordable housing problem by subsidizing it – is also a signal to states that they should look to curb their own contributions to the problem instead of simply seeking more federal handouts.  In Arizona, one of those factors is the residential rental tax – which disproportionately impacts low-income individuals.

Reforming land regs is a long-term endeavor and won’t solve the immediate need for low-income people in unaffordable housing markets.

But there are better ways to structure programs than the convoluted LIHTC program.  One such proposal with bipartisan support are “Housing Choice Vouchers (HCV).”  Instead of incentivizing profiteers to supply housing – HCVs empower individuals and families to access housing in places they desire to live.

This approach allows low-income families to move to higher income places which often gives them access to better jobs and school districts and affords children of low-income families’ greater opportunities to succeed.  Because the LIHTC programs provide greater incentives for building in designated areas of greater poverty, it has the direct effect of actually concentrating poverty and segregating poor people.

Arizona lawmakers should help poor people and protect taxpayers.

The expansion of this 30-year-old failed federal program in Arizona would be a big mistake. The bill being pedaled this year is not being backed by advocates for the poor; but by those who stand to gain the most – insurance companies, investors and banks.  If lawmakers truly care about the poor – and the taxpayer – they will resoundingly reject HB2365.

 

The individual health insurance market has been a roller coaster for consumers since the passage of the Affordable Care Act.

Last year, the average ACA plan rose 34 percent – pricing out many of the individuals who do not qualify for federal subsidies.  Additionally, many counties across the country have lost insurers, with only one option or even no options for consumers.    Younger, healthier Americans have been forced into high-risk pools to subsidize the high-costs associated with pre-existing conditions and other benefits they are likely not to need.   As a result, many have opted out of full coverage at all and risk incurring the Obamacare tax penalty for not carrying insurance.

After a failure of the Senate to repeal these disastrous policies, the Trump Administration has had few options for fixing our health insurance system.  However, a year ago, some progress was made on this front.

With the passage of the Tax Cuts and Jobs Act in December 2017, Congress included the repeal of the tax penalty for individuals without medical coverage for policies beginning in 2019.  Then in February of 2018, Trump issued an executive order allowing for the appropriate federal agencies to amend their rules regarding short-term duration health insurance.

Short-term duration insurance is not meant to qualify as full medical coverage, but instead is another insurance product available to help individuals through different periods of transition.  Trump’s executive order overturned the Obama Administration’s directive to limit these plans to only 90 days.  Instead they are now allowed to be issued for less than a year and may be renewed for up to three years.

These short-term plans will likely cost Americans half what the traditional ACA plan costs and the administration predicts around 600,000 people will choose these plans this year.  Of the over half a million people, no more than a third are likely to leave their ACA plan; with most enrollees coming from individuals without any insurance at all.

Opponents argue the reversal of this rule will poach enrollees in the individual market.  Obama’s rollback of short-term duration policies was meant to increase enrollment in the exchange.  But it didn’t work.  Instead, enrollment in the ACA plans decreased by 10 percent following the year of the rule change; which may have had something to do with premiums increasing by 21 percent that year.

There is a want and a need for more affordable policies that do not have all the bells and whistles of a traditional plan.  Under the Obama 3-month cap of short-term policies, enrollees would have to reapply every 90 days, forcing a reset of their deductibles or sometimes a cancellation of their policy altogether.  Given the short time frame, many customers would not be able to access full coverage insurance for months, until another enrollment period opened.

This rule change is good for consumers.  It will dramatically expand choice and opportunity for coverage to hundreds of thousands of Americans.

Now it is up to the states to ensure these options will be available to their constituents by amending their laws to allow for greater regulatory flexibility of short-term duration plans.  In Arizona, Representative Nancy Barto is sponsoring legislation to do just that.  We encourage lawmakers to support this common-sense bill and allow more Arizonans to access affordable coverage.

For over a year, the Club has been urging policymakers to address the looming tax conformity crisis. After the passage of the Tax Cuts and Jobs Act in Congress in 2017, it was realized that Arizona taxpayers could pay as much as $300 million more in FY2020 as a result of how Arizona conforms with the Federal tax code. It was never intended that federal tax reform would result in higher state income taxes, and is why a conform and reform plan must be adopted to stop the tax increase.

Yet with tax season now upon us, the legislature and Governor Ducey have still not agreed on a plan.  Instead, there have been overtures on identifying ways to justify keeping the windfall, including spending on new programs or sticking the money into the ‘rainy day’ fund. Make no mistake, any plan that does not include returning the money to taxpayers is a tax increase and should be rejected.

With time running out, crafting a conform and reform plan should be at the top of the legislative to-do list. Senator J.D. Mesnard (LD 17) has consistently shown leadership on the issue, and has introduced legislation that would conform Arizona with the federal tax code while forestalling the tax increase.

Under Mesnard’s SB 1143, each income tax bracket would be reduced by 0.11 percent for the 2018 tax year, a rate cut that would hold taxpayers harmless in the short term while not disrupting the filing process currently underway. This would also give lawmakers some additional time to consider a more robust conform and reform plan, similar to what has been adopted in states such as Idaho, Georgia or Utah.   The Club believes that conformity provides a great opportunity to improve and simplify Arizona’s tax code, but if an agreement cannot be reached on a reform package, returning the money to taxpayers is still better than any plan to keep it.

Following the implementation of a new higher-than-expected VLT fee, trust is thin with Arizona taxpayers.  The Legislature needs to rally around a conform and reform solution and not try to sneak another tax increase through the back door.

 

 



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The Arizona Free Enterprise Club is a free market policy and advocacy group dedicated to promoting a strong and vibrant Arizona economy.