Dividends and Housing

Some critics have charged that President Bush’s proposal to end the tax on stock dividends would benefit the “haves” in America more than the “have-nots.” One consequence of that proposal could directly impact the living conditions of many have-nots. Nearly all of the 1.5 million rental units built for low-income residents in the past 15 years were made possible by the Low-Income Housing Tax Credit program, which uses tax credits to entice corporations to invest in affordable housing. The federal government grants tax credits to states, the states divvy up the credits among housing developers, and the developers, in turn, sell the credits at a slight discount to corporations looking to limit their tax exposures. Armed with the cash from the sale of the credits, the developers then build apartments for low-income residents.

The program “has been a remarkably efficient mechanism for raising private sector equity for the development of low-income housing, attracting approximately $6 billion of investor capital and creating well over 100,000 affordable housing rental units each year,” according to an Ernst & Young study commissioned by the Washington, D.C.-based National Council of State Housing Agencies (NCSHA).

But the Bush tax plan could change all that. If the tax on dividends is eliminated, corporations are likely to forgo the purchase of tax credits in favor of maximizing the distribution of tax-free dividends to shareholders. “The shareholders could receive the benefit of tax-free dividends only if corporations had already paid taxes on their income,” explains Kim Shaffer, spokesperson for the National Low-Income Housing Coalition (NLIHC), based in Washington, D.C. “If the corporation had instead invested in tax credits, it would have less ability to provide the benefits of tax-free dividends for its shareholders.”