Texas' New State Housing Tax Credit Program — a Good Start, But Needs Meaningful Investment

By Whitney Parra-Gutiérrez, TAAHP Policy & Regulatory Manager & Kathryn Saar, TAAHP QAP Committee Co-Chair

The housing affordability crisis gripping Texas has reached a tipping point propelled partly by the lack of sufficient funding for affordable housing development. Until recently, Texas had yet to significantly allocate its own funds towards affordable, multifamily housing development, leaving the sector heavily reliant on federal programs. This historical underfunding, paired with unanticipated economic challenges of increases in materials, interest rates, and insurance premiums, created a dire situation where developers are now facing immense challenges in making developments financially viable. The shortfall not only stifles new construction but also affects the maintenance and preservation of existing affordable housing stock, exacerbating the crisis. However, in the last legislative session, Texas took a significant step toward addressing this missing component by creating a state tax credit program structure.

As states nationwide confront soaring demand for housing, relying solely on federal resources has become insufficient. In this environment, state housing tax credit programs have emerged as a crucial tool for increasing housing stock. With over 30 states implementing their own programs and several more considering similar legislation, these programs represent a billion-dollar-plus market for affordable housing development. Against a backdrop of mounting costs and budgetary constraints, the pivotal role of state tax credits in facilitating affordable housing development is more pronounced than ever.

Texas 88th Legislative Session

Texas made a historic investment to tackle the State’s housing shortage with the passage of HB 1058, authored by Representative Craig Goldman, which established the Texas State Housing Tax Credit Program. After several previous attempts failed over multiple sessions, TAAHP adopted the effort and successfully promoted it in the 88th Legislature. Due to the hard work and perseverance of Representative Craig Goldman and Senator Charles Perry, Texas housing developers now have access to this newly created funding source.

Funding Structure

HB 1058 amended the Tax and Insurance Code to permit a taxable entity with an interest in a qualified development to receive a credit against its franchise tax or its state insurance premium tax liability. The credit is claimed in equal installments over the ten-year credit period. HB 1058 caps the total amount of credits that may be awarded each year at $25 million beginning January 1, 2024 through December 31, 2029.

Opportunities for Growth

State housing tax credits represent a substantial commitment from the Texas Legislature, offering long-term economic benefits which far outweighing initial costs. To unlock the full potential of this program, Texas must ensure its efficient implementation and scalability in two ways: first, by increasing the state's allocation authority, and second, by removing administrative barriers that dilute the value of the credit.

Increasing Annual Funding Gap

Currently, the $25 million cap on the State housing credit ceiling limits the impact that the program has in the second most populous State in the Union. Similar programs in other states are funded at much higher levels, especially relative to their population size. For example, Ohio has a population that is a little more than a third the size of Texas, yet their state tax credit program is four times larger.

TEXAS FALLS BEHIND OTHER REPUBLICAN STATES IN ANNUAL STATE TAX CREDIT FUNDING

Increasing state housing tax credit funding is not a risky proposition; it's a proven strategy. Recognizing the escalating demand for affordable housing, many states have bolstered their annual funding levels for existing programs. Virginia, for instance, quadrupled its annual allocation of state housing tax credits from $15 million to $60 million in August 2022, citing the substantial economic benefits of robust investment in affordable housing. Similarly, Pennsylvania's housing tax credit program demonstrates the economic advantages of increased funding. A recent study revealed that every $10 million invested annually generates nearly $20 million in total economic impact, showcasing an impressive multiplier effect. These examples highlight the immense opportunity for Texas to replicate such economic gains by enhancing funding for its own housing tax credit program.

Removing Administrative Barriers

In addition to increasing funding levels, Texas can increase the usefulness of the state housing tax credit by removing administrative barriers which dilute its value. Currently, the Texas Department of Housing and Community Affairs (TDHCA), the state agency responsible for administering the state tax credit program, places a $1 million limit on the credits that can be awarded to any single project. A one-million-dollar allocation sold at $0.85 per credit would generate $850,000 in capital. On a $25 million dollar development, this is helpful, but would make up less than 5 percent of the total capital stack.

Further diluting the value of this capital is the administrative requirement to produce additional 30% AMI units in exchange for the state credit allocation. Units limited at 30% AMI have a net negative effect on the operating budget for a tax credit development – these units cost more to operate than they generate in income. Consequently, the capital generated by the state credit will function to cover lost revenue instead of creating an additional source of funding. This is a lost opportunity.

Economic Development Opportunity

Ultimately, expanding the funding for the Texas State Housing Tax Credit program represents a strategic investment in the state's future. Every dollar invested in affordable housing development will circulate within the state economy, driving business activity and job creation across various sectors. Embracing this approach demonstrates a commitment to addressing housing affordability as an important foundation for economic development in Texas, diversifying resources and expanding its toolbox to effectively tackle affordable housing challenges and unlock opportunities for sustainable growth and prosperity.