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The Tax Reform Act of 1986 is one of housing politics' forgotten stories. Through a few changes in accounting and taxation, the Age of the Dingbat ended, to be followed by the Age of the McMansion. Thread 1/ en.m.wikipedia.org/wiki/Tax_Refor…
Prior to 1986, the federal tax code subsidized apartment construction. For example, someone spends $15 million to build apartments. Every year, they could use depreciation to reduce their taxable income by $1 million, even if actual value of the building didn't go down. 2/
The top marginal tax rate back then was 50%, which meant that prior to 1986, the federal government was paying for half the construction cost of every privately developed apartment building in the USA. 3/
The Tax Reform Act of 1986 changed that. Reagan wanted to cut the top tax rate from 50% to 38%, but didn't want to cut the budget, so to make up for cutting the top rate, the depreciation subsidy for real estate was eliminated, along with other changes. 4/
This not only shut down the apartment construction pipeline, but it also left many recently built apartments cash flow negative. Many owners defaulted on their loans, and this was a major cause of the savings and loan crisis. Many small banks and credit unions failed. 5/
The Tax Reform Act of 1986's impact on housing was anticipated, & two compromises were made. The first was the Low Income Housing Tax Credit. LIHTC is an indirect federal subsidy. It allows businesses to fund low income housing instead of paying taxes. en.m.wikipedia.org/wiki/Low-Incom… 6/
The amount of subsidy provided by LIHTC was much less than the subsidy provided by depreciation, since LIHTC only applies to low income housing while depreciation applied to rental housing at all income levels. 7/
Low Income Housing Tax Credits also come with much overhead spent on accountants, lawyers, etc. They don't fund entire projects, rather, they are among the "matching funds" that affordable housing piece together on top of a base of local housing $ housingfinance.com/news/one-proje… 8/
Meanwhile, Reagan's 1986 tax reform act also added federal subsidies for people buying a single family home by increasing the subsidy towards the Mortgage Interest Deduction. MID basically makes income spent on a mortgage tax-free. Bigger house, bigger subsidy. 9/
In short, Reagan's 1986 tax reform cut taxes for the rich from 50% to 38%, killed local banks, brought urban middle income housing construction to a halt, and fueled suburban sprawl. 10/
Today, as we consider restoring the top tax rate to 70% and having a #GreenNewDeal , let's also look at the incentives in the tax code and the way they shape our society in ways larger but more subtlely than laws or direct funding might. 11/end
