Government Tax Perks: Who Benefits?
The Housing and Urban Development Coordinating Council (HUDCC) estimates that the country’s total housing backlog will accumulate to 3.6 million units by the end of 2018.
For some politicians, addressing this long-existing problem means giving the most generous tax and non-tax perks to real estate developers. This is a misinformed policy.
Currently, the government provides income tax holidays (ITH) up to four years to housing firms engaged in constructing economic and low cost housing.
In addition, the sale of house and lot priced up to P3 million is exempted from value-added tax (VAT). In 2015, the government had foregone the amount P3.5 billion in revenues for providing ITH and special tax rates to 86 real estate firms.
The provision of fiscal incentives to economic- and low- cost housing has been in the Investments Priority Plan (IPP) for so many years, but the housing shortage remains.
Under the second tax reform package, these incentives are proposed to be redesigned to make them targeted, performance-based, time-bound, and transparent. It is time to review whether the incentives are fair, effective in providing affordable housing to Filipinos, and not vulnerable to abuses.
Essentially, this translates to the question: “Are these incentives worth taxpayers’ money?”
As fiscal incentives are considered government expenditure, they are supposed to be subject to the level of scrutiny we apply in critiquing budgeted programs.
It is crucial to clarify definitions.
“Socialized housing segment” is for projects costing P450,000 or below, while “economic housing” covers the price range starting from P450,000 but not exceeding P1.7 million. These two groups capture lower income class and expectedly the biggest portion (already around 85%) of the housing backlog.
Meanwhile, “low cost housing” covers housing projects costing from P1.7 million to P3 million.
The “2.5 Rule,” used by real estate brokers to determine how much income one needs to buy a certain property, shows that only the richest 20% of Filipino households (earning P680,000 annually and above) can afford “low cost housing.” A misnomer, right?
Worse, an initial look at the firms receiving incentives shows that these include already profitable business entities like SM Development Corporation, Filinvest, and the Villar-owned Vista Residences. They are listed among the Top 1000 corporations in the Philippines.
In short, government providing tax perks to firms engaged in “low cost” housing does not necessarily mean housing for the poor. It means helping the portion of the housing backlog that would been addressed anyway even without incentives. In addition, the incentives caters to already-profitable enterprises. They will invest, even without the tax incentives. The incentives are clearly redundant.
SHORTAGE FOR THE POOR, SURPLUS FOR THE RICH
How about economic housing, one may ask?
In the case of low cost housing, the technicalities in the rules are being taken advantage of to divert benefits away from those who need it. There are reported cases where housing structures or adjacent condominiums are designed to mis-declare each piece as economic or low cost project.
For socialized housing, the real estate sector may say that at least there is the Balanced Housing Act (amended by the UDHA). It requires developers to allot up to 20% of either their project area or costs to constructing socialized housing units in the same city where their main project is located.
However, the law, which is struggling in terms of compliance monitoring (instances when socialized housing and main projects are not located in the same city, or that project costs are misdeclared, etc), still fails to effectively curb the backlog. And again, the underlying root cause is that these units and their prices do not accommodate the real poor.
Meanwhile, HUDCC says that of the total housing need by 2018, 1.1 million or 31% of this need is for households already with the capacity to afford housing.
There’s a disturbing picture of high rise condominiums in the metro recording very high vacancy rates, while the poor are on the streets or in unacceptable quality of housing. The excess supply of high-end and mid-cost homes has increased to over 550,000.
REFORMING FISCAL INCENTIVES FOR AFFORDABLE AND SUSTAINABLE HOUSING FOR THE POOR
Given that the population growth rate of the country has been declining — from 2.5% in 1990, to 1.6% in 2016 — it is crucial to look at poverty, urbanization, and other factors, that aggravate the shelter problem. It is expected that the government will target first the biggest portion of the backlog, which arises from unacceptable quality of housing. It covers actual lack of shelter, informal settlements, and dilapidated, condemned, or marginal houses.
The government must rationalize the redundant income tax and VAT incentives of the low cost housing developers, and use the taxes collected to augment Pag-IBIG housing loans for low income earners and direct subsidies to the homeless. This would not only make housing affordable but also sustainable for the poor.
Shelter is a basic necessity; many assert it is a human right. But addressing the housing issue does not simply entail building more houses, but mainly, matching supply and demand to prioritize housing for those who are economically disadvantaged.
Providing government support to firms that build houses for the affluent segment of the market does not at all make sense, and completely misses the point of good government intervention.