The Guru Is In
Schrodinger’s tax
By David A. Smith
5 min read
By the time you read this, tax-exempt private activity bonds will be dead. Or they won’t. The New Markets Tax Credit will be dead. Or it won’t. The top corporate bracket will be 20 percent. Or it won’t.
In Erwin Schrodinger’s famous 1935 thought experiment of quantum mechanics, a cat in a sealed box that would be instantly killed if a single subatomic particle decays was simultaneously both alive and dead…until someone opened the box to observe directly. We today are trapped in a world of Schrodinger’s tax incentives: the tax credits on which our business currently depends are trapped in a legislative box of uncertainty. While opening the box—the passage of time or legislation—will ‘collapse the uncertainty’ into certainty, when and how is unpredictable. Until then you must make decisions and take actions. You want to act, but what’s the right thing to do?
Tactically, you rush to the lobbying barricades. Emotionally, you panic (in private). Strategically, human instinct is to wait. Is it wise?
Strategic waiting is easiest for investors, where everything is money and yield. Simply defer mega-investments and dial back pricing on those where you have a compelling reason to move. Next year your bank will still have tax appetites, CRA imperatives, earnings targets to manage against, as well as corporate directors of tax to orchestrate the investor’s responses. For the last 12 months, in fact, the market has gradually “priced in” an expected decline in the corporate tax rate from its current 35 percent, shaving a few cents off typical LIHTC pricing.
For the rest of us, strategic waiting is a bad idea.
We have payrolls to meet, pipelines to manage and monetize, and, most importantly, livelihoods to maintain. We are committed to the business of affordable housing – but what will that look like when the tax box is finally opened?
To orient successfully, look past the discontinuity and ask yourself: What has value in any future?
The need for affordable housing will endure. Affordable housing does not exist in economic nature; immutable laws of land use and property development economics assure that in economies where the population or the GDP are growing, market prices for housing will rise, and the incoming new market supply will start at the top and work down. Unlike Lake Wobegon, where all the children are above average, the lower echelons of below-average income households will face housing unaffordability – unless someone intervenes to provide resources at the margin and rebalance the economics. Affordable housing was a national priority before LIHTC, and it will be a coast-to-coast priority after LIHTC.
The need to preserve and revitalize existing affordable housing will endure. Once built, affordable housing becomes a critical piece of community economic and social infrastructure; its loss is no less damaging than losing a dam, a bridge or an airport.
The need for skilled public-private affordable housing developers will endure. Though seldom given credit by the mega-property developers, affordable housing is both more complex than conventional and a more durable skill. As the American urban environment becomes physically more dense and complex, it likewise becomes politically more complex, and we in affordable housing have a three-decade head start over the conventional sector in mastering the skills needed to translate public policy and political desires into viable economic outcomes.
The value of structured finance that blends economic and social capital will endure. Just as the market will never produce enough affordable housing, the government as a totality will never be able to afford all the affordable housing it needs or wants. Pressure to be efficient in levering subsidy and capital resources is as enduring as gravity. Because of this, art and skill in capital finance will always be in demand.
The local political imperative for housing affordability will endure. In today’s America, affordable housing isn’t a uniformly national problem; it’s roughly a constellation of particular localized housing problems that are occurring everywhere in the country.
Indeed, when you reflect upon it, justifying a housing ecosystem where the federal government plays the dominant role in delivering subsidy is not obvious. While presidents and senators can duck thorny housing issues (Fannie/ Freddie reform, anyone?), governors, and especially mayors, cannot. Housing un-affordability varies dramatically from place-to-place, and almost always entirely as a result of policies – pertaining to job growth, NIMBYism, righteous development restrictions and economic spatial separation – that are entirely within the control of state and local officials, whose solutions to the problems created in their own political backyards is to clamor for more Washington money.
If affordable housing remains an urban imperative – which it will – and the federal government cuts back its financial support for affordable housing – which you fear – then political pressure will increase dramatically on state and metropolitan government.
Having thus discovered many core propositions of our business ecosystem are robust in all futures, you can then ask this question: Whose cat is it? Who’s really at risk when Schrodinger’s legislative box is opened?
Not yours. Not the Congress’s. The mayor’s and the governor’s – especially the governor’s.
If anything like the currently proposed tax reform passes, massive tax-expenditure subsidies that large urban states have been using to support their residential markets and palliate their affordable housing crises will suddenly be gone.
If you haven’t already done so, start making friends with your governor, because if this happens, after the period of shock, denial and turbulence, the affordable housing industry will suddenly be many an urban state governor’s best friend.
