There are some indications that the Bloomberg administration is about to cut back one of the most important tools it has for encouraging new residential construction.

Mayor Bloomberg has set up a task force of prominent developers, bankers, housing advocates, community organizers, and government officials to evaluate the merits of one of the largest tax abatement programs in the city, the 421-a program that lowers the new taxes ordinarily imposed on multiunit housing developments. The group will meet for the first time on April 12, with the expectation that a report will be delivered in the fall.

While task forces can be unpredictable, the mayor may be looking for a rollback of 421 benefits in order to produce more tax dollars. In his New Housing Marketplace Plan, he listed “upwards of $200 million in new capital funding” to be provided by 421 reform. Most likely the money will come from cutting back benefits to upper-income housing, although some may derive from changes in how the affordable housing component works.

Many informed observers likely agree with city officials that 421 has helped fuel the construction of more than 110,000 residential units, a large number of which would not have been built without the exemption,particularly in the early years.

But today the city is experiencing one of the longest residential booms in its history, prompting budget as well as housing officials to have the program re-examined. As the commissioner of Housing Preservation & Development, Shaun Donovan,wrote in his letter of invitation to task force members, the Bloomberg administration hopes to bring 421-a into “alignment with the significant changes that have occurred in New York’s real estate market.” In other words, if business is so good, do developers still need these partial tax exemptions? Calling 421 “HPD’s most widely utilized tax incentive,” Mr. Donovan has directed the task force to examine issues of geography, eligibility, level and terms of the benefits, and the negotiable certificate program,which is the affordable housing component.

The affordable housing certificate is itself a result of a mid-course correction during the Koch administration. Created in 1971 when few apartment buildings were being built anywhere in New York and property values were declining in many neighborhoods, the 421 program sought to encourage new investment by abating the taxes on the added value of new construction while maintaining existing taxes. This was in contrast to the city’s J-51 program, which actually reduced existing taxes on rehabilitated residential property.

Both 421 and J-51 are based on a longstanding economic principle that lowering taxes on improvements can encourage development.Yet both have periodically found opposition because the property tax is the heavy lifter of city taxes, bringing in 25% of the city’s revenues. Opponents argued that the city was simply giving away tax dollars to developers who were going to build on or rehabilitate their property anyway. In response, legislators modified the program over the years, most notably in 1984, when an “exclusion zone” was established, making Manhattan between 14th and 96th streets ineligible for 421 except when the developer agreed to provide a substantial amount of affordable housing.

The point was to eliminate any subsidy for luxury housing, but especially any luxury housing that was going to be built anyway. “We should provide tax subsidies,” Mayor Koch wrote in the New YorkTimes at the time,”but only in areas where their impact at the margin can make the critical difference. We should leave gold coast construction of luxury apartments to those who can provide the gold out of their own pockets.”

Concern about subsidizing the rich is at the forefront of the debate today,too. A task force member, Brad Lander, who is the director of the Pratt Institute Center for Community and Environmental Development, said he is most critical of the “market terrain where there’s no requirement at all for affordability, where a developer can get a 10-to 15-year as-of-right exemption for no affordability.”Another task force member, Carol Lamberg, who is executive director of the Settlement Housing Fund, isn’t so sure. “The last thing we want to do is stop housing construction,” she said.”We really need to study this so that the subsidies get directed where they’re needed to produce new or rehabilitated affordable housing in spite of spiraling construction costs.”

A great deal of energy will be spent on the negotiable certificates,which Mr. Lander said are “dramatically undervalued.” He believes they can be made more efficient while producing more tax dollars for the city. They are complicated. A developer building in the exclusionary zone – south of 96th Street and north of 14th Street – can get 421 benefits by buying certificates from developers who are building outside the zone. For each affordable rental apartment built in the outer boroughs or outside Manhattan’s exclusion zone, a builder gets five negotiable tax-abatement certificates that can be resold to other builders. To qualify for the certificate, the apartment building must be free of mortgage debt, keeping the rents low.

The certificates are expensive. Manhattan builders pay upward of $18,000 a certificate, sometimes paying more than $20,000. But the builder is then entitled to a 10-year tax abatement, plus up to three years for construction. In effect, this is a full exemption from property taxes for the first two years after construction. After two years, the tax becomes 20% of the assessment, then 40% two years later, until full taxes are paid in the 10th year.

This arrangement rankles many nonprofit housing advocates, who point out that the developer of a luxury 100-unit building can save more than $3 million by buying 100 certificates for, say, $1.8 million. A task force member, Bernie Carr, executive director of the NYS Association for Affordable Housing, would like to focus on the certificates with the hope of raising their price “to make them more approximate their value to the market-rate developer.”

But one of the city’s most prominent financiers of moderate-income housing, Michael Lappin, president of the Community Preservation Corporation, calls 421 a “crucial component of meeting the city’s housing needs.” He is wary of the many reform proposals being floated. “There’s no question but that the city has a problem on the affordable side,” Mr. Lappin, whose organization financed 13% of the non-luxury housing units in the city in the 1990s, said.”But you need Solomon-like skill to redraw lines or in troduce reforms that don’t result in disincentives to building middle-income housing, especially at the margins of the city. We all relied on unfettered 421 for years, and it worked. And it’s also true that the current boundaries probably work. As for the certificates, you can always debate the proper formula.”

A for-profit developer, Alan Bell, who built the Crossroads – an 83-unit market-rate apartment building on the Lower East Side – using 421-a, is deeply worried.A principal of the Hudson Companies, Mr. Bell has been in business for 20 years and has lived through full cycles of the housing market. “In general,” he said, “the city has a history of changing incentive programs at precisely the wrong time.You get a groundswell of opinion that some think it is a giveaway, people agitate, and suddenly the city cuts back too much, and chokes development just at the moment when the market starts to turn down.” The deal behind Mr. Bell’s building, the Crossroads, has been acclaimed by preservationists for having come up with the money that saved a historic church, St. Theresa’s, on Rutgers Street. Mr. Bell used a transfer of development rights as one tool, but said the numbers wouldn’t have worked without 421.

Mr. Lappin urges caution on reforms. There is a worst possible outcome, he said, and that is that housing doesn’t get built at all.