Why is the Treasury Excluding the Gulf Coast from Stimulus Benefits?

A recent Treasury Department ruling has disqualified the Gulf Coast region from a significant portion of stimulus funding specifically set aside to help low-income housing developments languishing due to the recession.

In question is whether low-income-housing tax credits granted by Congress in the wake of Hurricanes Katrina and Rita qualify for the American Recovery and Reinvestment Act's tax-credit exchange program, which allows state agencies to cash in the credits for grants to finish affordable housing projects that have stalled due to the finance industry's collapse.

Why Geithner would exclude from the nation's stimulus bill the region of America that most needs stimulating has baffled members of Congress, state legislators, lawyers, and advocates alike. At stake, according to the Louisiana Finance Housing Agency, are about 10,000 housing units, the bulk of which would be in New Orleans, and roughly $73 million in lost tax credits. "Not to mention the collateral damage," Jeff DeGrass, LHFA's director of public information tells me, "the loss of jobs, construction, and all the families displaced who were counting on these units."

The Treasury's ruling comes as Gulf Coast states are grappling with how to accommodate thousands of families who are now facing eviction from temporary housing units -- the infamous Federal Emergency Management Agency trailers. Those mobile units weren't built for long-term housing, and FEMA has already granted two deadline extensions for the estimated 143,000 families who have occupied them after the storm. On June 1, the agency issued a final eviction notice to the remaining 3,450 families still occupying the trailers. Advocates appealed to President Barack Obama to intervene so that families wouldn't end up in the streets, and on June 3, he answered.

The administration announced it would enable FEMA, the Department of Homeland Security, and the Department of Housing and Urban Development (HUD) to help the evicted families with $50 million in housing vouchers, options to purchase the FEMA trailers for $1 or $5, and broadened access to expanded case-management services -- including assistance with applying for income-based housing.

But this aid is predicated on the idea that there is ample housing in place for these families to transition into and ignores the fact that the FEMA trailers were never intended to serve as permanent housing. As Annie Clark of the Louisiana Finance Housing Agency told the Prospect, "Vouchers need housing units in order to be used. If there is no housing for people to go to, those vouchers don't mean anything."

According to the Greater New Orleans Community Data Center's most recent report, permits for the construction of new residential buildings dropped 28 percent in the second half of 2008 when compared with the first half, while home construction in general fell 25 percent. There were 86,845 blighted or uninhabitable units in the St. Bernard and Orleans parishes as of January, while the number of unoccupied residencies in the Jefferson, St. Tammany, and Plaquemines parishes increased from the year before. Rent in New Orleans is currently 52 percent higher than before Katrina hit. The snail pace of housing construction and rehab, and the cost inflation of the limited available stock, has left low-income families with few options.

One way that states have been able to incentivize low-income housing development is by issuing low-income-housing tax credits (LIHTCs). In December 2005, Congress passed the Gulf Opportunity (GO) Zone Act, which increased the number of LIHTCs that can be issued in states affected by the hurricanes. The GO Zone tax credits were particularly effective in 2006 and 2007, when the Louisiana Housing Finance Agency (which issues credits on behalf of the state) was able to allocate about $56 million in credits each year for developers to build low-income housing. But in 2008, as the economic collapse took hold, developers weren't able to acquire the outside capital needed to continue or complete bricks-and-mortar construction. Housing projects all over New Orleans and beyond are currently stuck in limbo largely due to mass disinvestment from the recession. With no properties to profit from or to be taxed, the GO Zone tax credits are useless to developers.

The American Reinvestment and Recovery Act (ARRA)stimulus bill was supposed to remedy this through a tax-credit exchange program that would allow state agencies to cash in unused LIHTCs for grant money that would then be distributed to restart stalled low-income housing developments. But Geithner decided that the GO Zone Act tax credits would not be included in the credit-exchange program.

The Treasury based its decision to exclude the disaster-area credits on a technical interpretation of the Internal Revenue Code's Section 42, which determines the authenticity of LIHTCs. According to a letter from Michael F. Mundaca, Treasury deputy assistant secretary for international tax affairs, the Treasury won't recognize the GO Zone tax credits because they are "determined," or defined, under a separate section of the Internal Revenue Code -- LIHTCs under Section 42; GO Zone under Section 1400N( c ). Mundaca argues that since the ARRA's credit-exchange program only covers LIHTCs under Section 42, the GO Zones are not covered.

However, section 1400N(c) reads that the GO Zone credits merely raise a state's LIHTC ceiling "for the purposes of section 42" -- meaning they are not a different kind of LIHTC but rather an increase in the number of LIHTCs a state is able to grant.

"There is no legal basis for disallowing the GO Zone credits in the credit exchange program except some discretionary judgement by Treasury," says Wayne Neveu, legal counsel for LHFA.

I consulted Anthony Freeman, a D.C. attorney who concentrates on government housing assistance programs and LIHTCs and is currently a partner with the law firm Holland & Knight. Freeman was deputy assistant secretary for Housing Policy and Budget at HUD during the Carter administration and represented the National Council of State Housing Agencies when the LIHTC program was first implemented as part of the Tax Reform Act of 1986.

Freeman finds the Treasury's ruling silly: "All the GO Zone credits do is give Gulf states additional LIHTCs to use, but they are still used under section 42 because that is the only LIHTC program that we have."

Treasury officials contacted by the Prospect deferred to the House Ways and Means and the Senate Finance Committee saying Congress needs to clarify their intentions. ARRA's Section 1602, which discusses the credit-exchange program, states, however, "The Secretary of the Treasury shall make a grant to the housing credit agency of each State in an amount equal to such State's low-income housing grant election amount," which Freeman and LHFA officials say gives Treasury the ruling power, not Congress.

Says Freeman, "Congress writes the law, and Treasury implements the law. The Treasury indeed has the capacity and the authority to interpret the laws Congress gave them."

After all, it was the Treasury's decision in the first place to exclude the GO Zone credits when enacting the ARRA's credit-exchange provision. If the question is Congress' intent, then Treasury is entertaining the rationale that authors of the stimulus bill hoped to assist all states with affordable housing tax credits except for the states and the credits used specifically to replace all the affordable housing lost during hurricanes Katrina and Rita.

When I spoke with LHFA President Milton J. Bailey, he provided a list of supporters of the LHFA's position, which includes almost every U.S. senator, representative, and state legislator in the Gulf -- Democrats and Repulicans. He also produced letters of support from legal tax experts ranging from the National Low Income Housing Coalition to members of the American Bar Association. He sounds vexed about the situation and has a litany of questions for the Treasury for which he says he's yet to get a suitable answer.

"If the best and brightest lawyers in the tax-credit industry think Treasury’s ruling is wrong, why hasn’t Treasury revisited the issue and revised their ruling in keeping with the president’s pledge to help Katrina and Rita Hurricane victims?" he asks. "Why should we have to wait months for a legislative fix when it is in Secretary Geithner’s power to fix it today?"

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