Tax hikes proposed on affordable housing

Affordable housing developers in Rhode Island are spending 2014 much the same way they finished last year, fending off attempts from municipal leaders to raise their taxes.
In Providence, a new ordinance passed by the City Council this past winter enshrined in local law the tax rate – 8 percent of gross rental income – affordable housing developments have been paying across the state since 1995.
It also solidified the tax treatment of newly constructed and future affordable developments, which had been a subject of debate with some officials arguing that only rehabilitated buildings qualified for the 8 percent rate.
The victory, however, was far from easy.
City councilors had to override a veto from Mayor Angel Taveras, who argued that the ordinance contained “loopholes so significant that, if enacted, it would put the entire city of Providence at risk.”
And ultimately the effort could prove fruitless if state lawmakers pressing for an increase in affordable housing taxes have their way.
For the second year in a row, a series of bills have been filed in the General Assembly to raise the tax paid by affordable housing developments from 8 percent to 10 percent.
Last time around, lawmakers approved the tax hike only to see it vetoed by Gov. Lincoln D. Chafee. Legislative leaders did not return for a special session to attempt an override of the veto.
“This is just to help the communities,” said Rep. Jan P. Malik, D-Warren, about his bill to raise the rate to 10 percent. “It seems like with each piece of legislation we hear about how bad the towns are doing and I think the whole dynamic of affordable housing has changed with [real estate] prices going down.”
In addition to Malik’s bill, a corresponding Senate bill has been filed by Sen. Roger A. Picard, D-Woonsocket, and an identical bill by Rep. Stephen M. Casey, D-Woonsocket. With several affordable housing developments and severe budget pressure, Woonsocket has pushed hard for the tax increase. The bill that passed last year was sponsored by former Rep. Lisa Baldelli Hunt, who is now the city’s mayor.
Barrington, which includes part of Malik’s district, has also been a focal point of the affordable housing debate, in that town’s case opposition by many residents to a handful of planned affordable housing developments has spurred animosity toward the state law.
Malik said opposition to specific projects is not why he supports raising the tax rate developments pay.
“You can never have enough affordable housing, but on the other hand these communities are cash strapped and we have to adjust these figures to reflect how things change,” Malik said. “These projects will still go on and … 2 percent should not hurt contractors.”
Malik said he does not know exactly how much his bill would raise in additional municipal revenue.
Affordable housing advocates, however, say rent-restricted properties cannot afford a 2 percent tax increase and support another set of bills that would keep the current rate while eliminating a gray area surrounding new construction.
The current law provides 8 percent taxation for any property that has undergone “substantial rehabilitation” and is “encumbered by a covenant recorded in the land records … restricting either or both the rents that may be charged to tenants of the property or the incomes of the occupants.”
Last year Providence began interpreting the “substantial rehabilitation” clause to exclude new construction from the 8 percent tax rate. Bills filed by Rep. Larry M. Valencia, D-Richmond, and Sen. Gayle L. Goldin, D-Providence, would remove the “substantial rehabilitation” clause and keep all deed-restricted properties at 8 percent. (They also include exemptions from property tax reassessments in Warwick and Central Falls for conventional properties.)
Another bill filed by Rep. Jeremiah T. O’Grady, D-Lincoln, would provide a whole series of alternative tax structures for affordable properties, in addition to the 8 percent rate.
In the message accompanying his veto of the recent Providence ordinance, Taveras said the current taxation system is ripe for abuse because the state law and city ordinance do not distinguish between nonprofit and for-profit developers, nor how much of any property has to be made affordable to qualify for lower taxes. This could allow a project to receive a massive tax break in exchange for a token number of affordable units, he said.
Instead of the current system, Taveras proposed handling affordable housing taxation through 20-year city tax stabilization deals that would equal the 8 percent gross rental income rate.
But Richard Godfrey, executive director of Rhode Island Housing, said concerns about for-profit, market-rate projects gaming the system are unfounded.
Raising taxes on affordable developments or even raising uncertainty about their future tax structure could, however, cause insolvency among some properties operating on thin margins and prevent new ones from securing financing, Godfrey said.
Godfrey said over the last 10 years, federal money for affordable housing has declined significantly, increasing competition for funding and making tax certainty a requirement for lenders. •

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