In conclusion
Cuts to food assistance, Medicaid, and other programs are part of Trump’s spending plan. However, it also raises a federal tax credit that supports California’s affordable housing development.
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Legislators in California are bracing for an unprecedented influx of federal funds for the development of affordable housing, a deluge of subsidies that proponents estimate may treble the state’s output of low-rent apartments over the next ten years.
It originates from a strange place.
Affordable housing advocates have long pushed for an increase in funding for the Low-Income Housing Tax Credit, but it is buried deep amid the social service cuts in President Donald Trump’s centerpiece spending package, the One Big Beautiful Bill. These tax credits, which are utilized in low-income projects across California, are the most significant federal financing source for affordable housing.
The precise impact of this hike in the Golden State will vary depending on a number of variables, such as state funding, labor expenses, tariffs, and more. Experts concur, however, that the modification may enable California to construct thousands more reasonably priced homes annually.
According to Matt Schwartz, president and CEO of the charity California Housing Partnership, which promotes affordable housing, it’s a huge thing. For the affordable housing sector, which has been suffering from depleted state resources, these provisions offer a major boost.
It is understandable that the public hasn’t paid much attention to those provisions. The federal law, which Trump signed on July 4, imposes massive spending cuts on Medicaid, other social safety net programs, and clean energy initiatives over the next ten years, while also extending and expanding tax cuts that disproportionately benefit the wealthiest and adding trillions to the national debt. There is much to despise and little to love for California’s liberal electorate and Democratic leadership.
According to Ray Pearl, executive director of the California Housing Consortium, a group that promotes the building of affordable housing, there have undoubtedly been many worries about that law from a California standpoint.
Despite the reluctance of many in blue California to publicly celebrate, the spending package gives advocates for affordable housing something to be happy about.
Pearl stated, “The federal government has given us a green light to double production because the expansion to the tax credit program, which was a part of an existing bill, was folded into the broader package.”
The state committee in charge of these credits approved modifications to its application procedure last week that encourage developers to utilize the new federal policy.
What is the precise relationship between tax credits and affordable housing?
It’s a huge deal.
Beginning in the 1980s, the federal government redirected the majority of its affordable housing monies through the tax system rather than directly funding the development of public housing as it had in the past. States give these tax credits to affordable developers, who resell them to wealthy banks, insurance providers, and other financial giants in exchange for tax breaks and ownership stakes in affordable housing projects.
It’s ubiquitous and a financial Rube Goldberg contraption. It’s likely that tax credits aided in the launch of any apartment complex in your neighborhood that is intended for low-income or homeless renters.
There are two fundamental types of credits. The new federal legislation is giving both a significant boost.
One credit allows its owners to deduct approximately 9% of a project’s construction costs from their annual taxes for a period of ten years. The federal government distributes those 9% credits to the states, who subsequently distribute them to developers. Particularly in California, there are usually more eligible projects than there are credits available to finance them. The budget plan supported by Trump increases the overall number of these credits by 12% annually indefinitely.
As there is no cap on the other credit kind, the 4% credit, any developer who meets the requirements can theoretically receive it. The rub is how a developer qualifies. In the past, in order to fully utilize the 4% credits, an affordable project must pay for half of its expenses using specific tax-exempt bonds, which are scarce, much as the 9% credits. According to the federal statute, a project just needs to use the bonds to pay for 25% of its total cost.
According to Pearl, the federal government is providing more tax credits and bond capacity, which is crucial for creating affordable housing around the country, particularly in California.
According to Marina Wiant, executive director of the California Tax Credit Allocation Committee, the state gets more bond financing proposals annually than it can provide. Last week, her committee decided to amend its proposal to comply with the new federal standards, which would allow projects that have already been approved to reduce their bond financing and lower the amount of a new project that must be financed through bonds. “There will be more bond money to go around and more projects will get funded because of that lower threshold,” she said.
According to Wiant, there are numerous projects that are still awaiting bond finance. As a result, this modification will take effect this fall really quickly.
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How did Trump’s spending plan initially include this increase in affordable housing?
According to him, Schwartz’s group and others have been battling for this tax credit increase for years, winning support from both parties. According to him, tax credits are often seen by Republican politicians as a beneficial form of subsidies. They are more acceptable than food stamps and other direct assistance that are perceived as handouts because they are utilized by corporations.
To what extent can these new tax credits be helpful? Depending on who you ask, yes.
According to an estimate by the accounting company Novogradac, the policy reforms might finance the building of an additional 1.22 million affordable rental units nationally over the next ten years. In California, that equates to about 20,000 additional units annually.
However, a lot of things could interfere. Developers may choose not to utilize the tax credits if the cost of construction increases due to tariffs, higher labor expenses, or interest rate increases. Additionally, Trump’s spending plan maintains low corporate tax rates, which may make the housing tax credits less valuable.
Additionally, due to the high cost of building homes in California, most projects require additional state and municipal funding in addition to tax credits. However, that money is scarce. The extra funding that was distributed during the COVID-19 outbreak has stopped. Last year, voters were supposed to vote on a $20 billion statewide affordable housing bond, but it was removed from the ballot due to concerns that it would not pass.
Therefore, Schwartz predicts that rather than 20,000 new low-income homes will be constructed annually in California as a result of these additional tax credits.
He stated, “I believe it will take us a few years to ramp up.”
Another possible barrier is that the Medicaid cuts in Trump’s spending bill, which are predicted to cause 3.4 million Californians to lose coverage over the next ten years, might make poverty worse for a large number of individuals and lessen the advantages of the tax credits.
Schwartz said it’s a great irony that the tax credit increase was included in this “big ugly bill,” as we call it, which is extremely detrimental.
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