Housing Trust Funds: Housing Solution or Extension of the Welfare State?

This semester I have been noticing a significant increase in orange “I support the Milwaukee Housing Trust Fund” buttons being displayed across campus. Due to the fact that I could find few conservative opinions on housing trust funds, I decided to go more in depth and base a paper I wrote for American Public Policy on the subject.

I have reproduced that paper here:

Brandon Henak
May 11, 2005

Housing Trust Funds: Housing Solution or Extension of the Welfare State?

Citing a two million unit housing supply deficiency and 4.8 million working families who have “critical housing needs”, proposals for Housing Trust Funds are sweeping the nation at the local, state and national levels (NHTF Fact Sheet 1). These funds are quickly becoming the new trend in dealing with everything from homelessness to the lack of jobs that pay a “living wage”. Those who promote the funds present them as a cure-all economic stimulant that will benefit almost everyone from banks to rural America. However, in the majority of cases, state and local governments must enact new taxes that provide the initial capital to start the funds. The proceeds are then used to fund housing for a variety of homeless persons, including those in need of psychiatric care, those earning below a “living wage” and the unemployed. Although some would argue that it is another form of wealth redistribution and will just increase the harmful corporate and personal tax burden, proponents of the funds point towards the ethical and empirical benefits of providing families and workers with good homes (Policy Link). A careful review of this ethical and empirical evidence demonstrates that politicians across the country need to fully consider all the implications of Housing Trust Funds before implementing them.

The first Housing Trust Funds, established in the 1970s, were instituted in order to supplement a lack of federal or state funding for affordable housing. According to the Philadelphia Housing Trust Fund website, “Housing Trust Fund is a dedicated funding source set aside for the housing needs of a community. Housing Trust Funds build affordable housing, repair homes and help families become first-time homeowners.” Philadelphia is one of the larger programs, however there are 53 such trust funds across the state of Pennsylvania. The first statewide Housing Trust Fund has been operating in Texas since 1993; they describe their Fund’s capital distribution in a way that “funds are available to non-profit organizations, units of local government, public housing authorities, community housing development organizations (CHDOs), and income eligible individuals and families. Eligible activities include acquisition, rehabilitation, and new construction of housing” (Texas Housing Trust Fund).

Over 4,000 organizations across the country, 200 members of Congress and numerous individuals, including the new head of the Democratic National Committee, Howard Dean, support Housing Trust Funds as a key “moral imperative” to combat the nation’s housing crisis (NHTF Fact Sheet and wwww.deanforamerica.com). Supporters of Housing Trust Funds from Milwaukee to South Carolina extol the virtues of clean, affordable housing for everyone (Milwaukee and South Carolina Fact Sheets). They detail the ethical dilemmas that exist, such as the fact that 1 in 3 of the victims of substandard housing are children and that the poor are being denied housing by developers who favor higher-rent, luxury apartments.

In Milwaukee, Wisconsin, Housing Trust Fund advocates highlight the fact that victims of affordable housing deficiency are forced to live in overcrowded or inferior condition minority dominated neighborhoods (Milwaukee Trust Fund Fact Sheet). The coalition of groups campaigning for the fund also highlight that 67% of single parent families, a largely underprivileged group, show a total adjusted gross income below $7,500, an income entirely insufficient for rent and living expenses. Not only would these funds help these single parent families in the direst of situations but they would also assist those in the community who pay an unfair amount, fifty percent or more, of their wages in rent. Anyone who is deemed underprivileged or deserves affordable housing including anyone who makes up to 50% of the median income can qualify for assistance from a Housing Trust Fund (Milwaukee HTF 1).

In Minneapolis, Housing Trust Fund advocates echo their national constituents’ ethical arguments as well as reflect on budget and moral issues. They point out that the 1% of their municipalities’ budget is a mere pittance in comparison to what is needed to fulfill their affordable rental needs that currently exist. The Minneapolis Housing Trust Fund Coalition describes the situation as the greatest “moral challenge” today and further reiterates the feelings of coalitions across the country by stating: “We cannot sustain a growing economy if we raise children in inadequate housing, almost assuring they will receive inadequate education and health care. It is unjust to have the people who prepare our lunches, handle our money, and take care of our children condemned to live in shelters or unsafe, substandard housing” (Minneapolis HTF 1).

Besides the large number of ethical arguments in support of Housing Trust Funds, a considerable amount of empirical data exists as well. Since most of the data sources that support Housing Trust Funds are proposals, they use theoretical statistics from economic studies done on the “halo effects” of increased housing development.
The first example of this is an estimate taken from the National Home Builder’s Association (NHBA) estimate that is quoted in the Milwaukee Housing Trust Fund fact sheet. The NHBA states that for every 100 single family units of housing constructed 65 jobs will be created, local businesses will experience a 2.8 million dollar income increase, and the local government will benefit from $384,000 in additional taxes. These trust funds then will increase job availability, improve business and eventually pay for themselves from the additional taxes they will generate if these multiplier effects hold true.

On a national level, the Center for Community Change conducted a study called Home Sweet Home: Why America Needs a National Housing Trust Fund. According to the study, a National Housing Trust Fund would be “a $5 billion investment in housing production (which) would initially create more than 180,000 jobs. When leveraged, this investment could result in up to 1.8 million jobs and $50 billion in wages.” These returns would then justify the wide variety of taxes necessary to raise the initial capital to start a Housing Trust Fund. The empirical and ethical evidence put forth by those proposing housing trust funds provide a solid base for policy analysis.

Although Housing Trust Funds can come off as a George Bailey for every community, opponents of the funds would argue that the social, tax and economic impact of such funds outweigh their projected benefits. George Bailey did not tax in order to provide for low-income new homeowners; he relied on his own funds as well as the funds of private investors. Farshad Maltes is the equivalent of a modern George Bailey. The corporation he works with, Wisconsin Housing and Economic Development Authority (WHEDA), is a private firm that provides loans to low-income individuals who often cannot get loans, so they can purchase a home or start a small business (Maltes). This has proved to not only be a huge help to the community, but it has been extremely profitable. Mr. Maltes also pointed out that one of the biggest advantages to purchasing a house and getting that loan, is to have the equity it provides in terms of deductible interest and remaining value after the loan has been paid off, an element that is missing in the rental options that Housing Trust Funds provide. These funds would be an entirely more acceptable and effective option if the were privately funded and run much like WHEDA.

Opponents of Housing Trust Funds also point out the empirical inefficiency of Housing Trust Funds due to the fact that they are merely another government-funded program that necessitate higher taxes and may provide a disincentive to work similar to some of the welfare programs the government has worked so hard to reform. Most of the programs rely almost solely on increased real estate taxes, hotel/travel taxes, public grants, direct appropriations (Texas HTF), or entertainment excise taxes (Milwaukee HTF). Arguments can be made that taxes are necessary and needed in some cases, but the taxes necessary to support this program sacrifice a large amount of efficiency for a proportionally low increase in equality. One of the main rationalizations for using tax dollars to pay for the housing trust funds is the aforementioned “multiplier effect”. The logic of the multiplier effect is inherently flawed, anytime money is spent, government or otherwise, it will have effects on the economy, however it has been proven time and time again that the money is spent most efficiently in the private rather than public sector. The Board of Governors of the Federal Reserve System have even disproved the multiplier effect in their essay on government spending and consumption. The Board states, “[When considering] the sensibility of the multiplier effect…A clear result emerges…A positive comovement of consumption and government spending requires a sufficiently high response of taxes to debt…and a sufficiently low response of taxes to current government spending … (and thus a larger increase in the budget deficit on impact).” (Gali et al 26).

The tax increases necessary to fund housing trust funds will also work against the job multiplier effect. If there are new taxes on businesses, realtors and developers, they will in turn hire fewer people and property exchange will decrease. These effects are not taken into account in the National Homebuilders Association’s calculations (Milwaukee HTF 2), effectively rendering those estimates, as well as those from Center for Community Change, inapplicable and inaccurate. In turn this debunks the empirical evidence of those who support housing trust funds in its entirety due to the fact that it was largely based on improperly calculated estimates.
Further empirical arguments point to the fact that a large amount of the funding appears to be going to rental units that are similar to and have the same problems that current subsidized housing does. For instance, the National Housing Trust Fund would like to spend $5 billion to build 1.5 million units of new housing over the next 10 years (NHTF Fact Sheet 2). However, only twenty five percent of that can be used for homeownership leaving the rest for rental or other purposes. This is contradictory to the noble goals of homeownership that are trumpeted by most housing trust funds. Since these units will be rented or sold below the market clearing price there is an incentive for the builders to cut costs and provide inferior units. In actuality, the housing trust fund money would be better spent on tax cuts, tax credits and deregulation rather than increased taxes and complicated trust fund grant systems. Many opponents of the proposed funds find little difference between raising the aforementioned taxes for this program and raising taxes in general.

None of the capital for Housing Trust Funds is to be taken from other government housing programs so to many, this is just seen as another attempt to redistribute with impunity. Cassandra Chrones Moore of the CATO Institute describes the Housing Trust Funds, claiming “in other words, the answer to the housing problem would be to constrain the building industry still further, increase regulations, and raise taxes (To support trust funds)”. She continues her thoughts on the subject and proposes getting at the root of the affordable housing problem instead of just spending money when she says, “They note how difficult it is for the public sector to overcome the obstacles of legalities, turf, and special interest groups”(Moore 3). Those obstacles hinder the private sector as well, but Felstein and Stegman are interested only in expanding the role of government, however inefficient it may be. Since it is politically easier to spend money, the report never addresses the root of the problem: overregulation”(Moore 4). Many share her view that if the government would reduce regulations on housing development, costs would be lower and this would not even be an issue. With lower taxes and less regulations, government spending and the taxes that accompany them would not be necessary because the initial development costs would be cheaper making affordable housing cost effective.

Ethical opposition to Housing Trust Funds are based on the historical evidence that increased welfare benefits have a positive effect on illegitimate births as well as traditional moral opposition to wealth redistribution. (Welfare Reform 2) Similar to other forms of aid, the Housing Trust Fund is meant to provide the homeless or those with low incomes the means to obtain a job and work their way out of such programs. These programs, even following the advent of welfare reform such as Wisconsin Works, still tend to promote illegitimacy by taking the traditional role of the father. The aforementioned statistics and actual operation of housing trust funds show little differentiation between some welfare programs and housing trust funds, in fact, they seem to merely be an extension or expansion of them under a new name. So as they have come to be viewed by some as an extension of the welfare state that unethically increases out of wedlock births, moral opposition by these groups is understandable. In turn, when considering the fact that the welfare state is being expanded, traditional wealth redistribution and the corresponding taxation is considered in jeopardy of increasing as well.

This may explain why this has become such a partisan issue. According to the National Housing Trust Fund website, the division in the House and Senate on this proposal is almost exactly down party lines. For instance, Co-Sponsors from Wisconsin include Reps Tammy Baldwin, Ron Kind and Gerald Klezka, all Democrats (Wisconsin 1). Through the process of comparing the inputs, outputs and effects of this policy in both an empirical and ethical manner from the views of those who oppose it, possible negative outcomes have surfaced that must be considered.

Solid policy analysis of housing trust funds from each facet of both those who support the funds and those who oppose them has exposed a full view of the policy and its impact. The proponents of local, state and federal housing trust funds make an impassioned plea for the least among us while citing the job multiplier effects of new housing development. Those opposed to the housing trust funds point out that incomplete estimates and new taxes will not make this new extension of the welfare state any more successful than the housing subsidies of the past. Due to the fact that many of these plans are still in the proposal phase the arguments are largely theoretical. Once some of the studies on the first housing trust funds are complete we will be able to see whose analysis is correct and make even more informed decisions within the affordable housing realm of public policy.

Works Cited

Gal??, Jordi; Lopez-Salido, J. David.; Valles, Javier. “Understanding The Effects Of Government Spending On Consumption” Board of Governors of the Federal Reserve System International Finance Discussion Papers
Number 805. April 2004

“Home Sweet Home: Why America Needs a National Housing Trust Fund” Center for Community Change. 2001. 10 Feb. 2005

“Howard Dean on Welfare & Poverty” Issues200.org. 29 Dec. 2003. 120 Feb. 2005

Maltes, Farshad. Personal interview. Spring 2005.

“Minneapolis Housing Trust Fund Proposal” Minneapolis Housing Trust Fund. 16 Jan. 2002. 10 Feb. 2005

Moore, Cassandra Chrones. “Housing Policy In New York: Myth and Reality” CATO Institute. Fall 1990. 5 Mar. 2005
.

“NHTF Fact Sheet” National Housing Trust Fund. 9 Feb. 2005. 120 Feb. 2005

“Opposition Arguments” Policy Link. 29 Dec. 2003. 120 Feb. 2005

“Philadelphia Housing Trust Fund Factsheet” Philadelphia Housing Trust Fund. 9 Feb. 2005. 120 Feb. 2005

“Texas Housing Trust Fund” Texas Housing Trust Fund. 9 Feb. 2005. 120 Feb. 2005

“Welfare Reform” Heritage Foundation. Fall 2004. 12 Feb. 2005

“Wisconsin” National Housing Trust Fund. Fall 2004. 10 Feb. 2005 .

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