Poor losing out as housing plan flops

At midnight on Dec. 31, approximately $240 million will be tossed onto the federal budget scrap pile. The money, targeted to build housing for the poor, is going unused. The funds are in the form of a tax credit for the middle class. But this group of potential investors, who can get a $1,500 tax credit for every $1,000 invested, is not using the credit. Individuals buy the tax credit from a developer building low-income housing that has been approved by the state. The developer can then use their money to build the housing.

Meanwhile, the individual investors use their new credit as a direct deduction from their federal tax liability, says Linda Cargill, executive vice-president of Boston Capital Partners Inc., a company that sells the credit.

Middle-class Americans aren't ignoring the credit, they just don't know about it. Taking advantage of it sounds like a simple process: The poor get housing and the middle class saves on its tax bills. But the credit regulations are complex, and states are having a hard time convincing developers that the money they could receive is worth wading through the paper work.

Those developers who have decided to work with the credit's complexities are running into problems selling the credit to the middle class. The credit was aimed at the wealthy until tax reform, so developers are trying to sell to an untapped and unaware market.

Responsibility for the tax credit is a new one for state governments, a task many of them are not prepared to handle, says Carl Riedy, executive vice-president of the National Council of State Housing Agencies.

The tax credit by itself is not enough to cover building expenses or the costs of running the housing once people have moved in. Builders must find state or federal programs to pay costs that income from low rents cannot cover.

Many states have been able to use only 25 to 40 percent of the tax credit funding available for 1987, knowing that the remaining amount cannot be transferred into next year's budget.

Housing is competing with other needs in many states for attention and funding, Mr. Riedy says. But West Virginia is being showcased as a success story of how to put the tax credit to work building housing.

The credit is difficult to work with in rural states such as West Virginia because families who need the housing have such low incomes that the credit's restrictions keep rent at very low levels. Rural states find it hard to come up with the difference between the income from these low rents and the costs of developing housing that would make it profitable or even feasible for a developer to build.

Instead of relying on state funds, West Virginia developers are taking advantage of funding offered by the Farmers Home Administration, a program that provides money to build housing in rural America.

Potential developers in the state were put off at first by the complex language and complicated formula used in the tax credit, says Michael McCullough, deputy director of the West Virginia Housing Development Fund.

``So, we wrote a handbook that is in the form of regulations of how to use the credit. Then tax lawyers and developers could see the language in a simplistic form,'' he says. The Housing Development Fund worked double time to get the handbook out this past spring, so it would not lose time between the closing down of the old tax-credit program and the start-up of the new one.

The Internal Revenue Service has been slow in issuing regulations for the credit, leaving state officials and developers to guess about the best way to use it, Mr. McCullough says. And severe penalties can be imposed if a state or developer fails to second-guess the regulations correctly.

``If once you go into occupancy, they decide you didn't follow the rules - which have yet to be written in total - there are provisions for recapturing the tax credit,'' says McCullough. Not only can the federal government take back the credit once the project is completed, but it charges the offending developer interest as well.

Right now state housing agencies are concentrating on how to market the credit. Massachusetts put together a video to sell the credit to corporate investors. ``In general, corporations have virtually no limitations or restrictions on benefits,'' says Ms. Cargill of Boston Capital Partners.

She points out that tax credits have opened up to a brand new group of investors. ``Before, you needed $125,000 in income and had to have a net worth of $250,000. Now you need to make $35,000 in income and have a $35,000 net worth,'' she says. ``If you owe the government at least $7,000 a year in taxes, you should be and can afford to invest in this kind of program.''

Cargill spoke last month to a group of people from state housing councils on whether the credit is getting off the ground. States have until the end of 1989 to show Congress that they can make this program work. If they don't, one of the last federal programs that funds housing for the poor will be cut from the budget.