An Introduction to the Low-Income Housing Tax Credit:
The low-income housing tax credit (LIHTC) program is the federal government’s primary policy tool for encouraging the development and rehabilitation of affordable rental housing. The program awards developers federal tax credits to offset construction costs in exchange for agreeing to reserve a certain fraction of units that are rent-restricted for lower-income households.
The credits are claimed over a 10-year period. Developers need upfront financing to complete construction so they will usually sell their tax credits to outside investors (mostly financial institutions) in exchange for equity financing. The equity reduces the financing developers would otherwise have to secure and allows tax credit properties to offer more affordable rents. The LIHTC is estimated to cost the federal government an average of approximately $13.5 billion annually.
In the 118th Congress, the Decent, Affordable, Safe Housing for All (DASH) Act (S. 680) would make a number of changes to the LIHTC program, in addition to affordable housing policy more generally. The proposed changes to the LIHTC include, lowering the bond threshold on developments that combine LIHTCs with tax-exempt bond financing from 50% to 25%; increasing the amount of tax credits states receive in 2023 from $2.75 per person to $3.90 per person, and then to $4.875 per person in 2024 (not including an inflation adjustment that would apply in 2024), and adjusting for inflation thereafter.
Requiring that at least 8% of a state’s annual allocation authority be reserved for buildings serving extremely low-income households; designating Indian areas and rural areas as difficult-to-develop areas (DDAs); allowing state housing finance agencies (HFAs) to provide a 30% basis boost to properties utilizing 4% credits and tax-exempt bond financing if deemed necessary for financial feasibility; providing a 50% basis boost for projects that reserve dedicated space for providing qualified supportive services;
Removing the requirement that state HFAs notify local jurisdictions of proposed LIHTC projects in such jurisdictions and removing the requirement that HFAs give jurisdictions reasonable opportunity to comment on the project, repealing the qualified contract option; and modifying and clarifying the right of first refusal rules.
The most recent legislative changes that affected the LIHTC program were included in the law commonly known as the Inflation Reduction Act of 2022 (P.L. 117-169; IRA). The changes allow developers that combine LIHTC with either the Section 48 energy investment tax credit or the Section 45L new energy efficient homes credit to realize the full benefits of those credits without reducing LIHTC amounts.
Prior to that, the most recent legislative changes to the LIHTC program were included in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which set a permanent minimum credit (or “floor”) of 4% for the housing tax credit that is typically combined with tax-exempt bond financing and used for the rehabilitation of affordable housing.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 also increased, for calendar years 2021 and 2022, the credit allocation authority for buildings located in any qualified disaster zone. For 2021, the increase was equal to the lesser of $3.50 multiplied by the population residing in a qualified disaster zone, and 65% of the state’s overall credit allocation authority for calendar year 2020. For 2022, the increase was equal to any unused increased credit allocation authority from 2021. Buildings impacted by this provision were also granted a one-year extension of the placed-in-service deadline and the so-called 10% test.
In the 117th Congress, there were a number of legislative proposals that would have modified and expanded the LIHTC program, most notably the Affordable Housing Credit Improvement Act of 2021 (S. 1136/H.R. 2573) and the various iterations of the Build Back Better Act (BBBA). The Affordable Housing Credit Improvement Act of 2021 formed the basis for most of the proposals in the BBBA, but included a broader set of changes to the LIHTC program. Neither act was enacted into law. A previous version of the Affordable Housing Credit Improvement Act was introduced in the 116th Congress.