Building Blocks: How Tax Incentives Lay The Foundation For Housing Growth

Introduction

The United States is facing a profound housing affordability crisis, driven fundamentally by a chronic under-supply of homes. While the causes are complex, a new research report makes a compelling case that property tax-based incentives including abatements, exemptions, and PILOT (Payment in Lieu of Taxes) programs, are among the most effective and fiscally responsible tools that cities can deploy to spur multifamily development and preserve affordable housing.

Titled Building Blocks: How Tax Incentives Lay the Foundation for Housing Growth, the study by RCLCO for the NMHC Foundation analyzes programs across eight diverse U.S. cities: Minneapolis, Portland, St. Louis, Buffalo, Seattle, Los Angeles, Manhattan, and San Antonio. The core finding is unequivocal: for every dollar a municipality forgoes in property tax revenue through these programs, it gains between $1.83\mathrm{<i><b>a</b></i>}\mathrm{<i><b>n</b></i>}\mathrm{<i><b>d</b></i>}$39.82 per year in additional taxes from new resident spending, operational expenditures, and other economic activity. Moreover, these programs directly increase housing supply often creating far more deed-restricted affordable units than required, thereby easing price pressures across the entire market.

The Core Argument: Why New Housing (Any Housing) Improves Affordability

A key premise of the report challenges a common misconception: that only explicitly subsidized affordable housing growth matters. The study reaffirms a consensus among urban economists: limiting new housing construction directly worsens affordability. When demand outpaces supply, prices rise. Conversely, adding any new housing whether market-rate or income-restricted helps balance supply and demand, moderating rent growth for all income levels.

Citing the California Legislative Analyst’s Office, the report notes that “as market-rate housing construction tends to slow the housing growth in prices and rents, it can make it easier for low-income households to afford their existing homes.” This occurs because new supply reduces competition for older, naturally occurring affordable housing growth. Therefore, tax incentives that unlock even market-rate development serve a critical public purpose: they prevent displacement and maintain housing affordability across the board.

Mechanisms of Tax-Based Incentives: Abatements, Exemptions, Credits, and PILOTs

The report categorizes the various tax incentive programs into four primary mechanisms:

1. Property Tax Abatements: A direct reduction on the tax bill. The property is assessed at full value, but the owed amount is reduced. Examples include St. Louis and Minneapolis.

2. Tax Exemptions: The program reduces the assessed value of the property, thereby lowering the tax liability. Common in Seattle and Texas.

3. Tax Credit Programs: Similar to the federal Low-Income Housing Tax Credit (LIHTC), these offer a lump-sum credit against the tax bill over a period (e.g., Colorado, South Carolina).

4. PILOT Programs: Instead of full abatement, the developer agrees to pay a small, fixed percentage of income (often with annual escalators) in lieu of standard property taxes. This allows the municipality to recover some revenue immediately. Buffalo’s program is a prime example.

These programs can target new construction, rehabilitation, or historic preservation. The affordability requirements vary: some are “direct” (requiring a percentage of units at a specific Area Median Income, or AMI), while others are “indirect” (simply stimulating overall supply).

Case Study Highlights: Eight Cities, One Success Story

The report provides deep dives into eight cities' housing growth, demonstrating how tax incentives function across different market conditions from high-growth (San Antonio, Seattle) to high-barrier (Los Angeles, Manhattan) to lower-growth (Buffalo, St. Louis).

Minneapolis’ 4d Program (Abatement)

Since 2018, Minneapolis has used the 4d program to reduce the property tax rate to just 0.25% for qualifying affordable units. While only 20% affordable units are required, a remarkable 68.1% of units in the program are for housing growth. The average building using the program was built in 1949, showing its power in preserving older workforce housing growth.

Portland’s MULTE Program (Exemption)

Portland’s Multiple-Unit Limited Tax Exemption (MULTE) offers a 100% exemption on improvements in exchange for affordability covenants. Before 2017, the program drove significant development, with 33.8% affordable units in participating buildings. The program now requires 99-year affordability, demonstrating a long-term commitment to housing growth preservation.

St. Louis Tax Abatement

With a program dating to the 1960s, St. Louis uses a flexible, case-by-case abatement (often >90% for 5-10 years). Between 2021 and 2023, over 33% of all multifamily deliveries used this incentive. The average building in the program was built in 1973, highlighting its role in adaptive reuse and renovation.

Buffalo’s PILOT Program

Buffalo’s program requires a minimum of 60% of units at or below 60% AMI one of the deepest affordability requirements in the nation. In return, developers pay just 5% of operating income (after vacancy) annually for 15 years. Astonishingly, 17.4% of Buffalo’s total multifamily inventory is in the PILOT program, proving that even naturally affordable markets need tax incentives to prevent future crises.

Seattle’s MFTE Program (Exemption)

Seattle’s Multifamily Tax Exemption (MFTE) is a scale giant: 32,000 units across 300 buildings, representing 18.9% of the city’s inventory. Since 2000, 44.5% of annual deliveries have participated. The program offers a 12-year full exemption for setting aside 20-25% of units at 40-90% AMI. The report notes a limitation developers rarely exceed the minimum, but the sheer volume of new housing supply added is transformative.

Los Angeles’ Mills Act (Historic Preservation)

A unique case, the state-wide Mills Act uses an income-based valuation (rather than market value) to lower taxes on historic properties. While 4,200 units have been preserved, the average building dates to 1933, so this program adds little new supply. However, the report notes that Los Angeles is exploring expanding the Mills Act to buildings over 30 years old to incentivize adaptive reuse a potential game-changer for converting obsolete offices to housing growth.

Manhattan’s 421-a Program (Exemption with Cap)

New York’s famous (and controversial) 421-a program offers a 100% tax exemption during construction and for 25 years post-construction, followed by a partial exemption for 10 more years. In return, at least 25% of units must be affordable (up to 130% AMI in some cases). Currently, 26,000 units in Manhattan benefit, representing 37.6% of annual deliveries. Critics say the benefits are too generous, but advocates counter that without the incentive, development in one of the world’s most expensive construction markets would cease, worsening the affordability crisis.

San Antonio Housing Trust (PFC Exemption)

The San Antonio Housing Trust uses a Public Facility Corporation (PFC) to grant a 100% property tax exemption and 100% sales tax exemption on construction materials. In return, participating buildings average 80.7% affordable units. The Trust has delivered 8,500 units (with 4,500 more in the pipeline), proving that a government-adjacent entity can efficiently deploy tax incentives at scale.

The Fiscal Reality: A Clear Return on Investment (ROI)

Perhaps the most critical finding for budget-conscious city officials is the return on investment. The report conducts a meticulous cost-benefit analysis, comparing the property tax revenue forgone against the new tax revenue generated from resident spending (sales taxes, local option taxes) and property operating expenditures.

The results are striking:

• Seattle gains **$39.82\ast \ast forevery$1 spent on the tax incentive.

• Los Angeles gains **$37.36\ast \ast per$1.

• Buffalo gains **$26.45\ast \ast per$1.

• Minneapolis gains **$13.71\ast \ast per$1.

• Even the lowest return, Manhattan (due to a smaller local capture of state-level taxes), still gains **$1.83\ast \ast forevery$1 forgone.

The report emphasizes that these are annual returns. Over the life of a 10-to-25-year abatement, the cumulative benefit to municipalities is enormous. This fiscal reality debunks the myth that tax abatements are giveaways. Instead, they are revenue-positive investments that also deliver intangible benefits like neighborhood revitalization, job creation during construction, and reduced homelessness pressure.

Key Takeaways for Policymakers and Developers

1. Supply is the solution. Any new housing market-rate or affordable helps moderate rent growth. Tax incentives are a proven tool to unlock supply in high-cost or distressed markets.

2. Partial abatements and PILOTs offer the best ROI. Programs where the municipality retains some revenue (Buffalo’s PILOT, Seattle’s capped exemption) provide the clearest and fastest fiscal payback.

3. Affordability requirements work. In almost every case study, developers exceeded the minimum required affordable housing percentage, driven by the certainty that tax relief provides.

4. Program design matters. Long-term certainty (e.g., 99-year covenants in Portland) and meaningful benefit amounts (e.g., 100% exemptions) drive participation. Conversely, programs with short terms or small benefits fail to pencil out for developers.

5. Preservation is as important as new construction. In cities like Minneapolis and St. Louis, tax incentives are primarily used to rehabilitate older buildings, preserving naturally occurring affordable housing that would otherwise be lost.

6. Overcoming local reluctance. Many localities fear the upfront budget impact of tax abatements. This report provides a data-driven blueprint, showing that the net fiscal impact is positive, often within the first year of occupancy.

Conclusion: A Blueprint for Housing Growth

The Building Blocks report concludes with a powerful message: as the housing affordability crisis worsens and financial feasibility shrinks (due to high interest rates, construction costs, and insurance), property tax-based incentives are not just a nice-to-have they are a necessity.

Cities that have implemented these programs have built or renovated tens of thousands of units, generated millions in new tax revenue, and improved the supply-demand balance without sacrificing their fiscal health. Whether it’s Minneapolis’s 4d, Buffalo’s PILOT, or San Antonio’s PFC, the mechanisms exist and have been proven effective.

For any municipality looking to lay the foundation for housing growth, the evidence is clear: strategic, well-designed tax incentives build more than apartments they build resilient, inclusive, and prosperous communities. The report serves as a definitive playbook, showing that for every dollar invested in tax relief for housing, the public treasury receives a handsome and lasting return, all while providing homes for millions of Americans.

Also Read: “The New Poverty Line in Urban Sri Lanka: What It Means for Affordable Housing Design”