Reducing or eliminating property tax can incentivize more apartment development and affordability.
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Reducing or eliminating property tax for projects that include some affordable housing set asides has become a common practice in the United States. The policies and programs are based on the correct assumption that when costs to produce housing go up, so do prices and rents. Property tax is not a trivial element of the costs of producing and operating housing. Building housing increases the value of property, and that increase in value results in higher taxes and operating costs, often dampening incentives to make improvements. Tax abatement and exemption programs to reverse this effect and create incentives take different forms. This brief survey is based on an analysis done by the Mortgage Bankers Association (MBA) of tax abatement and exemption programs for housing across the country.
Property Tax Reductions for Non-Profit Affordable Housing
Some states, including Alabama, Arizona, California, Hawaii, Oregon, and South Carolina, have abatement programs that have tax abatements for non-profits that provide affordable housing at varying income levels. Alabama exempts projects that meet the Department of Housing and Urban Development’s Section 202 requirements, and house senior citizens. Arizona offers a property tax exemption for non-profit organizations that have housing under a restrictive covenant, something typical of Low Income Housing Tax Credit (LIHTC) projects. In Texas, property tax exemptions are available for Public Facility Corporations, non-profit entities created by local government.
Property Tax Reductions for Mixed-Income or Workforce Housing
A classic example of these sorts of programs is Seattle’s Multifamily Tax Exemption (MFTE) program which provides an exemption on improvements to property if the improvement is housing with a set aside of 20% of the units at up to 80% of Area Median Income with a 12 year affordability requirement. The program has produced thousands of affordable units over its decades of operation. Washington DC has a geographic, formula driven abatement that grants a tax abatement equal to 75% of the improved value of the property provided that the development sets aside 5% of the units for low-income households and 10% up to 60% of AMI. The tax abatement lasts for 10 years but the affordability requirement lasts for 20. Other jurisdictions like Tillamook, Oregon and Montgomery, County in Maryland offer similar exchanges of set aside units for an exemption.
Historic Rehabilitation & Redevelopment Property Tax Reductions
Some jurisdictions offer exemptions for development projects that rehabilitate older, existing buildings. These include Georgia which provides an 8-year abatement, Philadelphia, with a 10-year abatement, Norfolk, Virginia with a 14-year abatement, and New York City with an abatement that can be as long as 34 years. These programs require improvements to properties that either currently provide housing or include some housing component, but none of them appear to have any affordability requirement. The MBA seems to have included them because they are exemption programs that create housing. I’m including them here because these sorts of exemption programs arguably create or preserve housing supply which arguably contributes to affordability. We’ll return to this discussion later.
Transit-Oriented PropertyTax Reductions
Putting more housing near transit, especially light rail stations, is a priority for jurisdictions that have invested in more rail infrastructure. Oregon’s Multiple Unit Housing Property Tax Exemption (MUPTE) program offers 10-year exemptions for projects that are adjacent to light rail or transit and include some level of affordability.
What each of these approaches has in common is a recognition that the increases in value created by new development create tax consequences that can disincentivize making the improvements in the first place. The concept behind property tax abatement for affordable housing is that reductions in taxes should result in some community benefit, whether in the form of rent restricted housing or more housing of any level of rent. Usually, jurisdictions have to balance the loss of tax revenue with the quantitative benefits of the improvements either in more affordable housing, increased future tax income, or both. Next, we’ll take a closer look at a couple of abatement programs, how they work, and whether they’ve succeeded.
