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A federal housing incentive could have untapped potential. photastic/

How affordable housing can chip away at residential segregation

With the health care debate stalling, Republicans are beginning to make more noise about tax reform. President Donald Trump has promised to make his bid to alter the code his next big battle, as has House Speaker Paul Ryan.

Though the low-income housing tax credit could land on the chopping block, it’s probably safe due to its history of bipartisan support. Along with politicians from both sides of the aisle, developers and many banks and nonprofits embrace it because the tax credit makes creating new affordable housing units financially feasible and less risky. Yet the program, which is the only significant federal subsidy for building affordable housing, could be in jeopardy as lawmakers seek to close tax loopholes and lower tax rates.

As a tax law researcher who has studied where properties built with this tax credit are located, I see good reasons to preserve it. Above all, this program has the untapped potential to help solve the intractable problems of residential segregation by race, ethnicity and class.

Affordable housing

Each year, the federal government delivers approximately US$8 billion in low-income housing tax credits to housing developers that agree to set aside a certain number of units as rent-controlled affordable housing for qualified tenants. Since it began in 1986, the program has helped create at least 45,905 affordable housing projects with nearly three million units.

Some recent research suggests that the affordable housing properties built with the tax credits help to integrate and revitalize otherwise poverty-stricken neighborhoods.

Notwithstanding these encouraging findings, I still worry that the program may reinforce racial and economic segregation in some cities. For example, affordable housing advocates have voiced concern about the program’s harmful effects on neighborhood choice in Dallas and New York City. In my own research about low-income tenants in Philadelphia, I have noted that they have few options to live in low-income housing tax credit projects outside of high-poverty neighborhoods where most residents are people of color.

This new St. Louis housing development is backed by federal low-income housing tax credits. AP Photo/Jeff Roberson

A new mandate

Here’s one possible explanation for the disagreement. Because there are no geographic restrictions on where affordable housing may go for builders to qualify for the tax credit, and there is no mandate that eligible projects help break up pockets of poverty, its impact inevitably varies.

Instead of leaving outcomes to chance, some affordable housing advocates and I are suggesting a solution: Housing authorities – which determine which affordable housing projects will be awarded the tax credits – should approve only properties consistent with new, broader anti-poverty and anti-segregation objectives.

For more than a decade, researchers have noted that affordable housing properties boosted by this tax credit are disproportionately located in low-income neighborhoods. Perhaps for this reason, an important line of research has sought to understand the tax credit’s impact on the communities surrounding new affordable housing projects. Though findings have varied, several researchers have found positive spillover effects.

In a recent report, Rebecca Diamond and Tim McQuade from Stanford’s Graduate School of Business offered new empirical evidence to support the view that the tax-subsidized properties benefit surrounding areas. They found that the projects increased property values, lowered the crime rate and spurred economic and racial integration – as long as the buildings were located in low-income neighborhoods where more than half the population was black or Latino.

The study didn’t detect these benefits, however, for affordable housing located in more affluent, predominantly white areas. Does that mean builders should go out of their way to site projects in low-income neighborhoods? Not necessarily.

Residential segregation in many U.S. communities has persisted. iQoncept/

A Philadelphia case study

Establishing affordable housing in low-income neighborhoods may give surrounding areas a small boost. But doing so exclusively may severely restrict housing options available to low-income tenants, leaving many without opportunities to live in other kinds of places.

My own research on siting patterns has focused on Philadelphia, a city with a history of residential housing segregation that still persists. I found that the number of low-income housing tax credit properties in a Philadelphia ZIP code is strongly correlated with the ZIP code’s poverty rate, or the percentage of residents below the poverty line, which varies according to family size. (Families of four earning less than $24,755, for example, fall into this category.)

My findings suggest that the projects have been – intentionally or not – clustered in low-income neighborhoods. In fact, 40 percent of Philadelphia’s 465 low-income housing tax credit properties built or rehabilitated since 1987 were located in just five low-income ZIP codes.

Since my study didn’t look at neighborhood change, I can’t say with certainty whether siting 184 low-income housing tax credit projects in those five ZIP codes has increased the racial and economic diversity of those neighborhoods over the past few decades. I don’t know whether the neighborhood homeowners benefited from having 30 or more low-income housing tax credit properties down the street.

What I can say is that the average poverty rate in those five ZIP codes was still 43 percent in 2015 (the city average is 26 percent), and 83 percent of the residents were nonwhite, compared with 58.3 percent of all Philadelphia residents. Meanwhile, most of these low-income housing tax credit properties are zoned for highly segregated public schools.

These are troubling statistics, given recent findings by New York University sociologist Patrick Sharkey that children who live in high-poverty, racially segregated neighborhoods are more likely to be even poorer than their parents when they grow up. This effect takes a toll on the generation of children living there and the next generation.

Mixed-income properties

Given the risks tied to living in overwhelmingly segregated neighborhoods, housing policies should encourage builders to construct affordable housing in more affluent areas.

Though the tax code calls for a larger tax credit for projects located in certain high-poverty census tracts, it lacks geographic restrictions or guidance on where they should go. In other words, the federal tax law is designed to increase the supply of affordable housing without saying where to put it.

Without siting mandates, the tax credit is relatively flexible and could, at least theoretically, help make poverty less concentrated. One possibility is to draw higher-income tenants to low-income neighborhoods through low-income housing tax credit-financed mixed-income housing.

The tax law allows for mixed-income projects, but Yale Law professor Robert Ellickson has noted that more than 80 percent of low-income housing tax credit properties are exclusively low-income. For the tax program to support a mixed-income strategy, developers would have to reserve fewer units for poor tenants. And that change that might undermine the program’s primary goal.

Housing vouchers

For this reason and others, policymakers should instead look to the program’s potential to aid other housing programs. For instance the $18 billion-per-year Housing Choice Voucher program is designed to give low-income renters choices about where they will live – including places where poverty is less concentrated than where they currently reside.

This program gives low-income tenants vouchers to help pay their rent. They agree to spend up to 30 percent of their income on rent, state housing authorities pick up the rest of the tab, and the federal government reimburses the states for that expense.

Many landlords won’t accept vouchers, sometimes because they worry that low-income tenants won’t pay their rent. Even the landlords who take vouchers can get skittish over compliance and inspection requirements.

But landlords renting out affordable housing units built through the low-income housing tax credit program aren’t allowed to refuse to lease to tenants merely because they plan to use vouchers. Disproportionately siting projects in poor neighborhoods may limit the tax law’s capacity to make the most out of this federal program.

In contrast, encouraging builders to place affordable housing in more affluent neighborhoods with this tax credit may give low-income renters more housing location options. For parents facing economic hardship, the ability to move to an affluent neighborhood may make it more likely that their kids will grow up to be better off.

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