Limited funds for affordable housing can be one of the biggest barriers cities face when seeking to increase housing stability in gentrifying neighborhoods. While a majority of funding for preserving and creating affordable housing has historically come from federal sources, these funds are inadequate to support local housing needs. As a result, many Texas cities have been relying increasingly on local revenue sources to improve housing stability–although the range of local revenue sources available to cities here is very limited due to state legislative limits.
Six important local revenue sources and financing programs that are currently being used in Texas cities to fund affordable housing and other housing stability projects are outlined here, along with the opportunities and challenges of using these tools.
Key City Financing ToolsGeneral Obligation Bonds
• Can generate large levels of funding over multiple years that are dedicated to affordable housing
• Subject to public vote: Affordable housing may not be a priority to all taxpayers
• Bond proceeds may fund only capital costs and not operational costs or support service Tax increment financing
• Transforms a funding mechanism with the potential to fuel gentrification into one that helps reduce the displacement of low-income residents
• Locks in ongoing contributions of city tax dollars towards affordable housing for many years
• Places the burden of financing affordable housing on future development rather than the current tax base Homestead Preservation Reinvestment Zones
• Special TIF model that restricts TIF funds for the development, construction, and preservation of affordable housing with deep income targeting
• HPRZs can currently be created only in the cities of Austin and Dallas, and in these two cities, the tool is available only on a very limited basis. Legislative changes are needed to expand use of this tool statewide. Type B Sales Tax
• Can be used to generate a dedicated source of revenue for certain types of affordable housing expenses, such as land acquisition, construction, and infrastructure
• Many Texas cities have already adopted a Type B sales tax, but very few are currently using the revenue for affordable housing.
• Cities are ineligible to adopt a Type B sales tax if their local sales tax revenue exceeds two percent, which is the case for Dallas, Austin, and Houston, unless the local general sales tax rate is reduced. General Revenue
• Not very reliable as a long-term source of financing; subject to annual political battles and competing priorities
• Subject to the state’s annual revenue caps on cities Fees in Lieu of Density Bonuses
• Fees in lieu are paid for by the developer of a project instead of taxpayers
• An inconsistent and unpredictable stream of revenue for affordable housing that relies on a strong real estate market and demand for denser development.