Tax Relief For Affordable Housing: Feasible, Simple, And Efficient

Forbes

07-08-2025

The last four posts in this series about property tax incentives to encourage more affordable housing have covered the concept in general and some specific programs in the country. Since property taxes are a cost, they ultimately end up being paid by the consumer. Lowering those costs in exchange for passing some of those savings to renters can be an efficient strategy to create lower cost housing for people who need it. Based on this review, here are the key elements that any abatement or exemption policy should have to be successful.
Feasible—When it comes to housing development, state and local governments have some significant controls over costs, and property taxes are one of them. A temptation for local government is to squeeze developers for so many concessions for affordability, like extremely low rents or high rates of inclusion, that those costs eliminate the benefits of any tax relief. Any successful property tax reduction or exemption must come with requirements that are additive, not dilutive of value for the housing developer.
Simple and Efficient—Programs to reduce tax costs and create affordability have to be easy to use. Too much administrative resistance at the front end or excessive compliance requirements adds real costs to development or operation. Rather than onerous regimes that assume housing developers and providers will game the system, rigorous evaluation of savings for taxpayers and residents is preferable. And the idea of tax incentives is that developers see more return on investment even while residents see lower rents and taxpayers get that affordability at a lower cost than other alternatives like Low Income Housing Tax Credits (LIHTC).
Balanced—Picking up on that last point, local officials must balance the need to deliver real benefits for the community with real costs of producing housing. Creating new housing, maintaining and operating it, and keeping up with costs is a marginal business; that is, ongoing operations of housing must yield at least as much income as the costs of operation. Just like any other business, rental housing has to at least pay for itself, and if those costs exceed rent collections, like any other business, a housing project will be in trouble. Many in the public want to extract concessions from 'profits' of funds from operation. But those urges must be resisted in favor of feasibility.
Focused on housing—The example of Oregon's program to uses property tax incentives is an example of one that simply asks too much. Building height is a necessary condition for creating density on a project site, and density does mean that more people can share the same costs of construction in the form of rent. This simple math—more people mean lower rents—is real. However, design mandates and inclusionary formulas for affordability miss the point, lower rents. Simple set asides allow developers more flexibility to build to feasibility rather than trying to meet some external standard that might add costs to production.
Negotiated rather than formulaic—And formulas are understandable when local governments want to create fairness and predictability. But applying them inflexibly across an entire jurisdiction can lead to low participation. Negotiated programs like Maryland's Montgomery County might be more challenging to administer which adds costs for both government and housing developers, but allowing site conditions and immediate economic factors to drive the balance of incentive and performance can lead to wider use of incentives and thus, more affordable units.
Exemptions are better than abatements—Exemptions for a set period with specific set asides seem to create the most predictability for the developer. The best performing program, with over 7,000 units created is Seattle's Multifamily Tax Exemption (MFTE). The exemptions edge out abatements because only reduce the taxes and don't eliminate them. It's worth a closer study to see if this truly matters, but in the case of the MFTE, the exemption has performed very well for developers, renters, and the City and its taxpayers.
This brief review of property tax and housing indicates one important fact: reducing the real costs of property taxes for affordability is a useful and efficient tool to create affordable rental housing. Just as important is that there are many options to translate tax reductions and exemptions into real affordability for people who live in rental housing. The next part of reviewing the role of taxation in housing production is a look at tax credits. The biggest tax credit program of all is the Low Income Housing Tax Credit. But what about programs that give more straightforward tax credits for housing? We'll look at those next.