Bush's Taxing Idea

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“I ask you to end the unfair double taxation of dividends,” President Bush said to congressional applause during his State of the Union address in January. Under the president's proposal, the Internal Revenue Service would allow corporations to pay tax-free dividends to their shareholders.

That might have sounded good to some at the time. But if put into effect, the Bush plan could end up gravely wounding the decades-old federal program that generates corporate investment in affordable housing.

Congress and President Reagan created the Low Income Housing Tax Credit program in 1986. Under this law, the feds award each state $1.75 in tax credits per capita annually–$33.2 million for New York in 2001. Local housing agencies, the state Division of Housing and Community Renewal and the city department of Housing Preservation and Development then award those credits to nonprofit housing developers building new affordable apartments. Those developers, in turn, raise money by selling those credits, typically through an intermediary, to corporations, which then cash in those tax credits with the IRS to lower their tax bills.

These tax credits help support the construction of roughly 3,000 housing units per year in New York City and about 115,000 nationally.

But if this new incentive is offered, affordable housing developers and advocates fear, corporations' interest in buying tax credits will diminish as well. “The low income housing credit would be virtually worthless,” Harlem Congressman Charles Rangel recently wrote in a letter to federal housing secretary Mel Martinez.

Housing is not the only industry that could be hurt by Bush's proposal. There are similar tax credit programs for investments in inner city retail development, renewable energy, and even in oil and gas exploration. Some investment professionals speculate that the proposal could also hurt corporate charitable giving, which reduces tax burdens, as well as the market in tax-free municipal bonds.

Congress is expected to consider Bush's full tax plan within the next few months. In the meantime, to determine if their fears are warranted, some national housing groups have hired the accounting firm Ernst & Young to analyze the situation.

Housing professionals are hopeful that the Bush administration will reconsider the dividend tax cut–or that Congress will modify the proposal to allow corporations to count money spent on the housing tax credit as taxable income. They are somewhat optimistic, not least because the Bush administration lobbied Congress last year to create a new housing tax credit that would support single-family homeownership.

“I find it hard to believe that the policy people in the White House are aware that [the dividend tax cut] undercuts their own policies and proposals,” says David Gasson, a vice-president at Boston Capital, a tax credit syndicator. “It just doesn't make sense.”

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