Session Title:
Government Regulation & Public-Private Partnerships
Government Regulation & Public-Private Partnerships
Date of talk or publication:
2005
2005
Speaker Name / Title:
Doug Guthrie & Michael McQuarrie
Doug Guthrie & Michael McQuarrie
Organization:
Harvard Business School & New York University
Harvard Business School & New York University
Description:
In the mid-1980s, American banks suddenly discovered the market for low-income housing. Today, the same large American banks that assiduously avoided the inner city in the 1970s and early 1980s are the largest investors in low-income urban housing markets, committing hundreds of billions of dollars in loans and development funding over the last decade. But the view of scholars who trace this change to the Community Reinvestment Act (1977) is mistaken. The CRA, when it was introduced, did little to change the business logic of banks in the low-income urban housing market. What did was a mistake in the tax code passed as part of the Tax Reform Act of 1986. Originally meant for individuals, the Low-Income Housing Tax Credit (LIHTC) became the single greatest boon to corporate America in the last 30 years. Through the LIHTC corporations were able to access a double benefit in the tax code explicitly denied to individuals. Banks, being corporations, stood to benefit the most from the double-dip in the tax pool. But banks were also under additional pressure that dated back to the CRA to invest resources in the low-income communities in which they did business. The LIHTC provided a vehicle for doing so. The combination of the LIHTC and the CRA provided banks not only with a double tax break, but also the mechanism for safely increasing CRA ratings. It was the synergy between the CRA and the LIHTC that provided the institutional basis for the creation of the low-income housing market for banks.
In the mid-1980s, American banks suddenly discovered the market for low-income housing. Today, the same large American banks that assiduously avoided the inner city in the 1970s and early 1980s are the largest investors in low-income urban housing markets, committing hundreds of billions of dollars in loans and development funding over the last decade. But the view of scholars who trace this change to the Community Reinvestment Act (1977) is mistaken. The CRA, when it was introduced, did little to change the business logic of banks in the low-income urban housing market. What did was a mistake in the tax code passed as part of the Tax Reform Act of 1986. Originally meant for individuals, the Low-Income Housing Tax Credit (LIHTC) became the single greatest boon to corporate America in the last 30 years. Through the LIHTC corporations were able to access a double benefit in the tax code explicitly denied to individuals. Banks, being corporations, stood to benefit the most from the double-dip in the tax pool. But banks were also under additional pressure that dated back to the CRA to invest resources in the low-income communities in which they did business. The LIHTC provided a vehicle for doing so. The combination of the LIHTC and the CRA provided banks not only with a double tax break, but also the mechanism for safely increasing CRA ratings. It was the synergy between the CRA and the LIHTC that provided the institutional basis for the creation of the low-income housing market for banks.