Tax credits are a large and opaque market with a direct impact on taxpayers. Taxpayers can use tax credits to offset current or future tax liabilities by buying them from another taxpayer who participated in the activity that granted the tax credits.
There are widespread problems with tax credit systems - I will use affordable housing tax credits as an example. Politicians and council members may steer funds towards developers who support them during campaigns. Contractors may push inflated costs toward affordable housing projects. Staff can accept bribes to bump people up on the waitlist for affordable housing. Residents who are technically low-income could take advantage of the system or stay in the affordable units after they are no longer eligible.
Solution:
A public system of tax credits that allows for issuance, monitoring, trading, funding, and operations.
- A public list of proposals for tax credits that can be approved and monitored openly.
- Public but anonymized data on residents in affordable housing so the effectiveness of tax credits can be understood by taxpayers and governments.
- An open market of tax credits that can be controlled and monitored using smart contracts.
- A public but anonymized system for the selection of developers and residents so corruption can be limited.
- Smart contracts are used to release funds for construction after verification from third-party inspectors.
Any household below the median is technically eligible for affordable housing. By definition, that means half of all households are eligible. So, developers and owners are incentivized to pick residents who are at the top end of the income threshold, which is not the intention of the program.
Major reform is necessary to fix the tax credits system, but a good start would be to use technology for public transparency and oversight into the mechanics and effectiveness of the system.