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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.

 

Today the Free Enterprise Club released our Judicial Retention recommendations for the 2018 ballot. Under Arizona’s merit selection system, judges periodically appear on the ballot for voters to determine if they should be retained. A ‘YES’ vote retains the judge, a ‘NO’ vote removes the judge from the bench. All of the judges that the Club recommends for retention have met Judicial Performance standards to remain on the bench.

Arizona Supreme Court

Justice Clint Bolick—YES

Justice John Pelander—YES

Arizona Court of Appeals

Peter Swann—NO

Peter Eckerstrom—NO

Philip Espinosa—YES

Christopher Staring—YES

Maricopa Superior Court

Bradley Astrowsky—YES

Alison Bachus—YES

Cynthia Bailey—YES

Janet Barton—NO

Mark Brain—NO

Gregory Como—YES

David Cunanan—NO

Sally Duncan—NO

George Foster—NO

Warren Granville—NO

Jennifer Green—YES

Michael Herrod—YES

Samuel Myers—NO

Erin Otis—YES

Susanna Pineda—YES

Laura Reckart—YES

Howard Sukenic—YES

Danielle Viola—YES

Joseph Welty—NO

With early ballots scheduled to be mailed later this week, the Free Enterprise Club has released our recommendations for each of the statewide initiatives on the November ballot. There are a total of five measures on this year’s ballot, three of which are proposed amendments to Arizona’s constitution.

We believe that our recommendations are consistent with the Club’s mission of promoting economic freedom, limited government and a strong and vibrant economy in Arizona.

Prop 125–Vote YES

Amends the state constitution to allow for additional legislative reforms to the Correctional Officers Retirement Plan (CORP). While they are limited in scope, the proposed legislative reforms will reduce future liabilities and pension debt for taxpayers.

Prop 126–Vote NO

Would amend Arizona’s constitution to prohibit any future changes to Arizona’s tax code related to service taxes. While the Club opposes higher taxes, we do not support locking our sales tax code in the constitution into perpetuity. Additionally, taxpayers are already protected from future tax increases under Prop 108 (which requires a 2/3 vote to raise taxes).

Prop 127–Vote NO

Tom Steyer backed initiative that would insert a 50% renewable energy mandate into Arizona’s constitution. The Club opposes sweeping changes to our Constitution that will raise costs and picks winners and losers (SRP and other government utilities are exempt from the mandate).

Prop 305–Vote YES

Referendum that will expand Arizona’s Empowerment Scholarship Account (ESA) program to allow parents to send their child to a private school of their choice. The ESA program is capped at 30,000 students and includes transparency and accountability measures in the program. The Club supports expanding choice and opportunities for parents and students, and Prop 305 is a step in the right direction.

Prop 306–Vote YES

In 2016 it was discovered that candidates that finance their campaign with taxpayer money funneled over $100,000 of those funds to political parties. Instead of fixing the problem, the Clean Election Commission codified the abuse, and even expanded the rule to allow public funds to go to political special interest groups as well. The Club urges a YES vote on Prop 306, which would prohibit any taxpayer funded candidate from giving those funds to political parties or special interest groups.



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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.