Affordable housing proponents are breathing easier since the House and Senate passed a tax bill on May 23 that left out a dividend tax provision which would have threatened the development of low-income apartments in New York and nationwide.

For months, housing advocates and elected officials–including Mayor Bloomberg–have been lobbying against a Bush administration proposal to let corporations pay their shareholders tax-free dividends. Under that plan, if corporations used tax credits to discount their income taxes, their dividends would still have been fully taxed. This provision, many feared, would make tax credits for affordable housing unattractive or downright worthless.

“Essentially, it would have killed the program,” said David Gasson, vice president of Boston Capital Corporation, which sells housing tax credits to corporations.

But in a last minute about-face last week, President Bush abandoned his attempt to end taxes on corporate dividends, instead adopting a Republican House plan that merely reduces those taxes, paving the way for incentives for affordable housing construction to continue–at least for now.

Enacted in 1986, the Low Income Housing Tax Credit program gives $1.75 in tax credits annually per capita to each state; in New York in 2001, that worked out to $33.2 million. New York’s housing agencies–the state Division of Housing and Community Renewal and the city Department of Housing Preservation and Development–award those credits to nonprofit housing developers, which in turn sell them to corporations for about 90 cents on the dollar. Those companies then use them to pay their federal tax bills.

The money raised each year helps build more than 40 percent of all affordable apartments: 115,000 nationwide, and 3,000 in New York City.

Eliminating the dividend tax, some economists predicted, would have caused the number of affordable units built to drop by 40,000 each year. According to a report by the accounting firm Ernst & Young, investors would stop buying stock in corporations that use housing tax credits, preferring other corporations that paid full taxes on income and thus offered tax-free dividends. As a result, the market value of housing tax credits would fall. This would lead to decreased financing, which would make many affordable housing properties economically unfeasible.

With dividend taxes still around, though–they will range from 15 to five percent depending on an investor’s income–“we’re pleased with the new law,” said a staffer at the National Council of State Housing Agencies. But, warns Boston Capital’s Gasson, Bush feels strongly about abolishing the so-called double taxation on dividends, so “the White House will bring up the proposal again.” If that happens, supporters of housing tax credits will have to revisit the issue.