Illinois’ unrelenting homelessness crisis and rising construction costs are adding momentum to a new state-backed tax credit that advocates say would help local governments generate as many as 3,500 new affordable homes across the state each year. But with a potential recession looming and federal aid about to dry up, advocates must convince skeptics that the $35 million-per-year program will be worth the cost to taxpayers.

New housing construction has lagged for residents across the income spectrum for decades — especially in Illinois, where the D.C.-based nonprofit Up for Growth calculated a unit underproduction of 120,000 homes last year. The shortage is especially acute for low-income renters, who are often unable to afford to live in buildings without government subsidies. The advocacy group Housing Action Illinois last month counted more than 450,000 “extremely low-income” renter households in the state, but only about 150,000 affordable rental units available to them.

“The rental market is being squeezed, which is why we feel we need to ramp up the production of affordable housing,” said Allison Clements, executive director of the Illinois Housing Council.

Clements’ group, a coalition of affordable housing developers and other real estate professionals, has been pushing since 2019 for state leaders to launch a new tax credit program to incentivize new affordable apartment construction. The Build Illinois tax credit is modeled off the federal Low-Income Housing Tax Credit program.

The federal credits only meet a fraction of the demand among nonprofit developers. And even when applicants score the subsidy, they must mix them with a panoply of other loans and funding sources to make their project viable, Clements said.

As drafted, the Build Illinois Homes Tax Credit Act would dedicate $35 million each year to a new fund that the state would make available to developers who have already secured federal Low-Income Housing Tax Credits but need more subsidy to attract investors and lenders. Legislators considered adding the program to a 2021 omnibus housing package that included a range of other affordability measures, but they decided instead to seed new affordable housing construction with $225 million in grants from the American Rescue Plan Act.

The infusion of federal cash “has really been a lifeline to affordable housing projects that have faced increased costs” from inflation and rising interest rates, Clements said. But the money will run dry in Fiscal Year 2024, which begins on July 1.

Most of the money from the proposed tax credit would be awarded through the Illinois Housing Development Authority, but about 25% would be routed through the Chicago Department of Housing, which awards Low-Income Housing Tax Credits to about a dozen affordable housing developers every two years.

The money would generate about $60 million in new annual equity for affordable housing construction in Chicago, enough to bankroll as many as 500 new affordable apartments in the city each year, according to Marisa Novara, commissioner of the Chicago Department of Housing.

“That’s a big deal for us,” Novara said in an interview. She noted that Chicago often leaves federal tax credits on the table because the city can’t come up with enough additional subsidies to make them attractive to developers.

“We don’t have a lot of cash resources to match the Low-Income Housing Tax Credits we get,” Novara said. “The problem is that those credits are not set up to cover the entire deal.”

The Chicago Department of Housing has signed onto the Build Illinois Homes tax credit bill as a supporter, Novara said.

Affordable housing developers like Bickerdike Redevelopment Corporation are also rooting for the bill to pass. Bickerdike CEO Joy Aruguete called the plan “a stroke of genius” that “would make a huge difference” by adding tools for nonprofit developers to cobble together financing.

“The Low-Income Housing Tax Credit is the number-one tool for the production of affordable housing in the United States today,” Aruguete said. “But the issue is that it’s not a standalone product — you really need to have other sources of funding to fulfill the entire financing.”

The bill, sponsored in the House by Rep. Dagmara Avilar (D-Romeoville) and in the Senate by Sen. Mattie Hunter (D-Chicago), missed last week’s deadline advance through the House. But its supporters say they’re optimistic its language will be written into the state budget set to be passed later this spring.

The tax credit plan is not without skeptics. During a legislative subject matter hearing last month, Rep. Martin McLaughlin (R-Barrington Hills) flagged the proposal’s $35 million annual cost “at a time when taxes in the state of Illinois are becoming almost unbearable.”

“I think we forget quite often when we mention federal and state tax credits as if they come off a fruit tree, but the reality is that you’re talking about tax credits paid for by the taxpayers of Illinois,” McLaughlin said.

Clements of the Illinois Housing Council noted in response that the tax credits would only be paid out once the projects are completed, meaning private investors must front the entire cost of construction. The delayed payments also mean the credits likely won’t cost Illinois taxpayers anything until Fiscal Year 2026, she said.

Clements also pointed to data showing that similar tax credit proposals in Georgia and Wisconsin drummed up economic activity that more than offset the cost of the subsidies.

“This is generating new construction jobs, sales tax on materials…the cost of the state tax credit is more than offset by the return generated,” Clements said. She cited a model based on national homebuilding data that predicted 3,500 additional new units of affordable housing built each year would generate nearly $300 million in state and local taxes during the next 10 years.