State auditors are warning lawmakers that a state tax credit created to encourage construction of low-income housing could have a substantial cost to the state in the long term.
They estimated that the state tax credit, approved by the Legislature in 2022, could cost as much as $250 million a year in lost revenue after about 10 years depending on the value of the tax credits that are awarded.
There is no cap on the state tax credits that can be awarded, leading auditors to caution lawmakers on Tuesday that the financial impact could be “substantial.”
“I can’t see the future so I can’t say what’s going to happen, but there does appear to us to be some sort of financial risk here we thought you all might want to look into,” said Josh Luthi, principal auditor.
The affordable housing tax credit was among nearly $200 million in incentives approved by the Legislature in 2022 to jump-start the housing market in rural Kansas.
The package of incentives was believed to be one of the most significant housing investments in state history at a time when some cities and counties throughout the state had so few homes available that they were struggling to attract employers.
Auditors examined the affordable housing tax credit because state law requires them to evaluate all new development incentives the year after they begin.
The affordable housing state tax credit was created with the intent of matching federal low-income housing tax credits.
If a housing project gets some amount of federal tax credit, the project also gets an equal amount in state credits to help subsidize construction of affordable rental housing.
Owners of the housing projects can sell the state and federal tax credits to investors in
exchange for investment in their developments.
The sales of the tax credit helps the housing developers reduce project costs, which in turn allows them to offer lower rents.
Investors who purchase the state tax credit can use it to reduce their state income, privilege or premium tax liabilities.
Investors may carry forward unused tax credits for up to 11 years.
Additionally, investors can claim the tax credit they purchased every year for 10 years, which is separate from the carry-forward provision.
For example, if the Kansas Housing Resources Corporation – the administrator of the program – awarded a project $1 million each of state and federal tax credits, the owner of the project can sell $1 million in credits every year for 10 years,
The investors who purchase the credits can claim them once the project is complete and occupied.
In this example cited by the audit, the total cost of the tax credit is $10 million in foregone state and federal tax revenues over 10 years.
However in 2023, KHRC awarded about $25.1 million in state housing tax credits for 24 housing projects, according to the audit.
Because the credits may be redeemed annually each year for 10 years, this represents about $251 million in state tax credits over the next decade.
State housing officials told auditors that the 24 housing projects have an estimated development budget of about $540 million and will produce almost 2,200 housing units that will remain affordable for 30 years.
Republican state Sen. Caryn Tyson of Parker is a member of the joint Legislative Post-Audit Committee and chairs the Senate Tax Committee.
Tyson said her committee would look at the housing tax incentives that were the subject of the audit at the start of the legislative session.
The Kansas Housing Resources Corp. issued a statement Wednesday responding to the audit.
“Historically, Kansas has lagged behind peer states in attracting sufficient housing development, in part due to a lack of state incentives,” the agency said.
“These investments will yield substantial returns for years to come, providing new homes, jobs, economic development, and growth and prosperity for Kansas communities.”
Taxpayers can’t claim the credit until the project it’s associated with has been built and occupied by residents, so it could be several years before taxpayers are able to claim the credit, the audit said.
“In the long run, the cost of this program to the state could be significant,” the audit said.
The Kansas Housing Resources Corp. will continue awarding new credits in future years, and each award creates credits that can be redeemed annually, the audit said.
However, the actual cost will depend on the credits awarded, the audit said.
Before the state tax credit was available, KHRC officials said they didn’t get as many applications for the federal tax credit as they did in 2023.
“If demand for the state and federal credits decreases and is closer to historical levels, the cost to the state will be less,” the audit said.
For example, based on historical data, state revenue officials estimated the cost of the state tax credit could be about $144 million a year.
State law doesn’t cap the amount of state tax credits that are awarded each year and is limited only by the amount of federal credits that are awarded.
Auditors noted that tax revenues created by the housing projects that occurred because of
the state tax credit may help offset the cost of the credit.
They said the state may collect income, sales and construction-related tax revenues it otherwise wouldn’t have received, but it’s too early to evaluate the economic impact of those.
KHRC officials told auditors that the state tax credit is helping them allocate more of the tax-exempt bond amounts the federal government gives the state each year.
Audits and evaluations from four other states – Colorado, Georgia, Missouri and Oklahoma – found state low-income housing tax credits helped create affordable housing, according to the audit.
However, a 2014 audit from Missouri found such tax credits may be economically inefficient. The audit found only about 42 cents of every of dollar of state tax credit went toward the construction of low-income housing.
“That’s because the rest of the credit value is absorbed by things like federal income
taxes and administrative costs associated with selling credits,” the Kansas auditors reported in their audit.
“The audit also concluded some Missouri projects that received state-level housing tax credits likely would have happened even if the state-level credit hadn’t existed.”
By contrast, a 2022 study from Georgia evaluated the economic effects of housing projects that wouldn’t have been economically feasible without state tax credits, the Kansas auditors said.
That evaluation found each dollar of foregone state tax revenues generated about $5.79 in economic activity and about $0.17 in state and local tax revenues.
