Press Release

CSS Report:  421-a Costing City One Million Per Affordable Apartment Created

Organization calls on state lawmakers to exchange fundamentally-flawed housing program with one that matches value of subsidy to contribution to affordable housing supply

First conceived in 1971, the 421-a tax exemption was billed as a stimulant for a lagging private residential market with a strong affordability mission built in. As the economics of the city’s housing market changed over the years, it has evolved into a spectacularly inefficient affordable housing program that today costs the city more than a million dollars per affordable apartment created.

A new Community Service Society (CSS) report analyzing the impact of 421-a argues against continuing the housing program because the tax exemptions that developers receive at great public expense produce very little by way of affordable housing. The report also counters the claim that development would cease without 421-a, or that 421-a is needed to compensate for high land and construction costs.

421-a is responsible for losses of   more than $1 billion annually in foregone revenue to the city  -- more than the combined rents of the half a million tenants living in New York City Housing Authority buildings – while producing well under 14 cents of affordable housing investment for every dollar of tax subsidies. Of the tax revenue forgone through 421-a, a majority of it is being used to subsidize buildings that would have been developed without the tax exemptions. 

“As wasteful public subsidies go, 421-a has no equal,” said David R. Jones, President and CEO of the Community Service Society. “The billion dollars lost annually on this tax abatement debacle is enough to fund 100,000 new rent vouchers similar to Section 8, and thus provide housing to many of the city’s poorest people. Instead, it funds fewer than 12,500 households living a little below the city’s median income. It’s time to scrap 421-a come up a housing program that is accountable and actually promotes affordability.”

On June 15, the 421-a tax exemption will expire. State lawmakers are currently deliberating on what to do with the program. In the past, lawmakers have made modifications to the law in an attempt to increase the production of affordable units. However, reforms made in 2006 and 2007 have not resulted in a significant improvement of 421-a’s efficiency as an affordable housing tool. In fact, previous amendments to the program included exempting some Manhattan luxury properties from complying with the affordability rule altogether.

In the report, “New York’s Unaffordable Housing Program: Time to End 421-a,” CSS housing experts Tom Waters and Victor Bach make the case for abolishing the program and replacing it with a  new subsidy that provides a benefit that is in proportion with the building’s contribution to the city’s affordable housing supply. This could be a targeted tax credit similar to the federal Low Income Housing Tax Credit, a rent subsidy similar to federal Section 8, or a combination of subsidies similar to Mitchell-Lama. But the guiding principal should be that developers must apply for the benefit based on the affordability they promise to create.

From its evaluation of 421-a, CSS also determined that the city’s poorest people are not being targeted in the affordable units created under 421-a. Instead, the tax exemption is currently subsidizing more than 150,000 apartments, of which fewer than 12,500 are “affordable” — meaning the rents for these units are limited to fit households earning about $46,600 for a family of three. Households in this income band, to be sure, face significant housing stresses. But the housing needs of poorer people are even greater. The program has produced no units for households with incomes below or near the poverty line, except when combined with other subsidies. 

“If the goal is to create a truly effective and efficient affordable housing tool, policymakers should stop wasting time negotiating amendments to what is a fundamentally-flawed program and devise one that is built on the principle of offering a subsidy in exchange for affordability benefits of similar value,” said Tom Waters, CSS Housing Policy Analyst and lead-author of the report. “Our housing policy already favors developers. With 421-a, New York has an opportunity to balance the scales, and better use the tax code to meet our more pressing housing needs. “

Summary of Report’s Key Conclusions

  • At $1.07 billion a year, 421-a is the largest single housing expenditure that the city undertakes, larger than the city’s annual contribution of funds for Mayor de Blasio’s Housing New York plan.
  • The annual cost of 421-a to the city exploded during the recent housing boom as a result of market changes, not because of any intentional policy decision to increase the amount of tax incentives for housing construction.
  • Half of the total 421-a expenditure is devoted to Manhattan.
  • The 421-a tax exemption is a general investment subsidy that has been only superficially modified to contribute to affordability goals.
  • The 421-a tax exemption is extremely inefficient as an affordable housing program, costing the city well over a million dollars per affordable housing unit created.
  • The reforms made to 421-a in 2006 and 2007 have not resulted in a significant improvement of 421-a’s efficiency as an affordable housing program.
  • A large share of buildings that receive 421-a and include affordable housing also receive other subsidies, such as tax-exempt bond financing. Affordable units in these buildings cannot be credited entirely to the 421-a program.
  • The great majority of the tax revenue forgone through 421-a is subsidizing buildings that would have been developed without the tax exemption.

Policy Recommendations

  • Allow 421-a to expire when it sunsets on June 15, 2015.
  • Replace it with a targeted tax credit or other new incentive that is structured to provide benefits only in proportion with a building’s contribution to the affordable housing supply.

 

READ MORE: New York’s Unaffordable Housing Program: Time to End 421-a

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