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2/7/03 - Miami Herald

Housing for poor needs shelter
By Douglas Hanks III

President Bush's plan to help the working poor buy homes would be hobbled by his push to lower tax bills for stock-market investors, according to critics in the housing industry.

Bush wants to let shareholders collect profits tax free from companies, provided the companies have already paid taxes on the profits themselves. Bush made the dividend exemption a star element of his $674 billion economic stimulus plan, while lambasting the current system as taxing profits twice at the expense of investors.

But if shareholders would emerge as winners under the Bush dividend plan, critics say the big losers would be corporate tax shelters -- including the roughly $2.5 billion in housing tax credits Bush proposed this week as part of his 2004 budget.

The new dividend exemption would present many companies with a novel dilemma: Pay more taxes or anger shareholders. While tax credits currently bring higher profits by lowering tax bills for corporations, under the Bush plan those tax discounts would mean more taxes for many investors.

The result, critics say, could be a fall from grace for the dozen or so federal tax credits designed to pump private money into various good works, from historic preservation to energy conservation.

''Companies love to invest in affordable housing, but not at the expense of shareholder value,'' said Buzz Roberts, vice president for policy at the Local Initiatives Support Corp., which helps revitalize poor neighborhoods.

The home-building credits are modeled after a widely praised program that has subsidized the construction of 1.3 million low-rent apartment units since 1987, including 20,000 in South Florida. In 2001, government agencies assigned $4.5 billion worth of credits to developers, who then sold most of them to Fortune 500 companies wanting to lower their tax bills.

Leaders from the apartment-credit industry first sounded the alarm several weeks ago about Bush's dividend plan, and they pointed to the proposed home-building credit as proof of the White House's muddled thinking on the issue.

A dividend exemption ''clearly makes the credits worth less. The question is, what's the magnitude of that loss?'' said Michael Novogradac, a San Francisco accountant who specializes in apartment credit investing. ``I think the loss clearly could be substantial.''

The administration has mostly remained silent on the dispute, which has yet to receive much public attention. Rep. Charles Rangel wrote Housing Secretary Mel Martinez last month asking why the administration proposed treating foreign tax credits -- which apply to overseas profits -- as taxes paid in calculating dividend taxes, but would not do so with the apartment credits.

''The president's proposal could have a catastrophic effect'' on the rental program, the New York Democrat wrote.

The administration maintains critics are being too simplistic in predicting that tax-free dividends would hurt tax credits. At a Jan. 29 meeting with industry groups, Bush officials acknowledged the dividend plan might prompt a shake-out in the tax-credit market, according to two industry representatives who were there.

Many current buyers of the apartment credits -- mostly banks and lending giants Fannie Mae and Freddie Mac -- pay large dividends to investors, so they would probably feel strong pressure from shareholders to drop tax shelters, the administration officials said. But they predicted other investors -- including companies with small dividend payments and individual investors -- would pick up the slack, according to the participants. Administration officials did not respond to requests for comment on the matter.

The tax-credit issue could have an impact on two national developers based in Miami-Dade County.

LNR Property owns about $74 million worth of low-rent apartment complexes built using the tax credits and has received more than $125 million worth of the credits from the government, according to an October regulatory filing. The country's major home builders -- including LNR's sister company, Lennar Corp. -- are expected to be significant users of the proposed home-building credit. Officials from both companies declined to comment for this story.

The proposed home-building credits would subsidize up to 50 percent of the cost of building a new home or rehabilitating an old one. Developers, both companies and nonprofit groups, would sell them to investors at a discount in exchange for cash and use the money to fund construction. The government would require developers to build in poor or rural neighborhoods and reserve the homes for buyers making no more than 80 percent of the local median income, making the ceiling about $33,300 in Broward and $28,700 in Miami-Dade.

The credits would cost between $16 billion in lost tax revenue over 10 years, according to administration projections, and create as many as 50,000 affordable homes a year.

Sheila Crowley, president of the National Low Income Housing Coalition, criticized the tax credit proposal as once again ignoring the housing needs of the poorest Americans.

While the apartment credits have significantly expanded housing options for many low-income people, she said the very bottom of the economic ladder still can't afford the subsidized rents, much less a home purchase.

Even without the dividend controversy, the home-building credit might have trouble getting passed this year because of the tight federal budget, said Alan Hirmes of Related Capital, which brokers apartment deals.

Bush first endorsed the credit as a presidential candidate and Congress has considered it before -- under much rosier budgetary circumstances.