There are many reasons to regret the likely failure of the Bush administration’s plan to eliminate the tax on corporate dividends. But however it ultimately fares, the proposal yielded an important collateral benefit: it revealed the falsehood of the claims made for Community Development Corporations—entities that have become sacred cows for liberals.

Numbering in the thousands across the country, CDCs over the past 20 years have become the primary vehicle for the construction of new low-income housing in cities. CDCs have always asserted that they are simply grassroots groups, using the power of organized low-income residents to revitalize poorer neighborhoods. As the National Congress for Community Economic Development puts it: “CDCs are entrepreneurial and indigenous; they derive their leadership and governance from residents and other stakeholders in the communities they serve and can therefore uniquely assess local needs and tap into local resources.”

But in fact, the apartments that CDCs build are just a new form of public housing, completely subsidized by federal government largesse—money the Bush proposal would (inadvertently) have had the effect of sharply reducing. That’s why the CDCs and their allies screamed foul about the Bush plan, in the process making it clear that they are not really indigenous, grassroots institutions at all.

Despite a low public profile, the Low Income Housing Tax Credit has ultimately financed the construction of 100,000 units of low-income housing a year, much of it built by CDCs. Since 1986, CDCs have had the legal right to raise money for housing projects by selling the tax credits to corporate “investors,” who could reduce their corporate tax liability by buying the credits. The credits were a good deal for corporations, since they could buy a dollar’s worth of tax relief for about $0.90. And that income stream was the lifeblood of the CDCs.

But as a February Ernst and Young report commissioned by the National Council of State Housing Agencies makes clear, if the government were to stop taxing dividends, housing tax credits would lose a significant part of their value. Reason: the administration’s proposed cut would have exempted from taxes only that portion of a dividend that derives from corporate income already taxed—the cut’s rationale, after all, was to end double taxation. Shareholders would still have to pay taxes on any portion of their dividend not yet taxed at the corporate level. As a result, the Low Income Housing Tax Credit suddenly would become worth less to corporations, since earnings attributable to the credit, now less valuable to investors, would now count for less in determining the share price.

To keep the after-tax benefit for the shareholder constant, the price of Low Income Housing Tax Credits would have to decline to about $0.72 for every $1 of tax relief—meaning that the income stream to CDCs would shrink, allowing them to build 30,000 to 40,000 fewer subsidized rental units each year, Ernst and Young estimated.

Liberal “affordable housing advocates,” predictably, saw such a prospective drop as a crisis. “America,” wrote the Council of State Housing Agencies, “cannot afford the loss of a single affordable apartment, let alone 40,000.” Advocates proposed that the proceeds from low-income housing investments should enjoy what might be called double non-taxation—no tax at either the corporate or the individual level.

The Low Income Housing Tax Credit has been a premier example of liberal Congressional sleight-of-hand. Lacking the capacity to pass large budget appropriations for low-income housing—largely because of public housing’s terrible track record—Democrats have used the tax code to coerce “investments” and have called the result a public-private partnership. The dividend tax cut would have reined in this charade. Perhaps the administration should consider a more direct approach to accomplishing the same thing.


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next