Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit (LIHTC) is a federal tax incentive designed to encourage the development of affordable rental housing for low-income households. Since its inception in 1986 as part of the Tax Reform Act, the LIHTC has become the largest source of affordable housing financing in the United States. This program has subsidized over 47,500 projects and 3.13 million housing units, using an average of $8 billion in forgone revenue to subsidize the costs of building more than 107,000 units across 1,411 projects each year. Despite its significant impact on affordable housing, the LIHTC has faced skepticism and calls for its repeal. This article will provide an in-depth analysis of the LIHTC, including its structure, pricing, efficiency, distributional effects, and the impacts of the recent financial crisis on the program.

The LIHTC program operates through a complex structure involving federal, state, and private entities. The Internal Revenue Service (IRS) allocates tax credits to state Housing Finance Authorities (HFAs), which then distribute the credits to developers based on their guidelines and the minimum affordability requirements set by the Department of Housing and Urban Development (HUD). Developers can sell their credits to investors in exchange for project funding, allowing them to begin construction. Once the project is completed and placed in service, the IRS officially allocates tax credits to developers, who then transfer the credits to their investors.

The LIHTC program offers two major credit types: the 4 percent credit and the 9 percent credit. The 4 percent credit is awarded non-competitively through the federal government and does not impact a state HFA’s annual allocation. It is typically used for projects already receiving most of their funding through tax-exempt bonds or other government subsidies. The 9 percent credit is awarded through a competitive allocation process by state HFAs, which develop a Qualified Allocation Plan (QAP) to detail the minimum requirements for credit eligibility and scoring criteria for project applications. The LIHTC program is designed to be efficient by providing developers with financial incentives to build affordable housing units. However, the program’s efficiency can be affected by market conditions and investor demand.

The LIHTC program has significant distributional effects, primarily benefiting low-income households by providing them with affordable housing options. The program requires that a certain percentage of housing units be rent-restricted and reserved for lower-income families, ensuring that the benefits are targeted towards those most in need. However, the program’s impact on different income groups and regions can vary depending on the allocation of credits and the specific projects funded.

The 2007-2008 financial crisis and subsequent recession had a profound impact on the LIHTC program. The crisis led to reduced income for corporations, decreasing the need for many firms to offset their taxable income with nonrefundable credits. This resulted in a sharp decrease in affordable residential construction and applications for the LIHTC. Fannie Mae and Freddie Mac, the largest government-sponsored mortgage financers, withdrew from the LIHTC market in 2008, causing significant funding gaps in many LIHTC projects nationwide. To address these challenges, Congress enacted two programs as part of the 2009 American Recovery and Reinvestment Act (ARRA): the Tax Credit Assistance Program and the Tax Credit Exchange Program. These programs provided federal grants and funding to assist LIHTC projects struggling to find investors.

In response to the financial crisis and ongoing economic conditions, several policy changes have been proposed and implemented to strengthen the LIHTC program. The 2018 Consolidated Appropriations Act increased the number of tax credits available by 12.5 percent in all states through 2021 and added new affordability guidelines. These changes aim to increase the availability of affordable housing units financed through the LIHTC. However, the program’s future remains uncertain, with ongoing debates about its cost and effectiveness. The Joint Committee on Taxation (JCT) calculated that the LIHTC costs about $9.9 billion annually, and the Congressional Budget Office (CBO) projected that repealing the credit would increase federal revenues by $49.4 billion between 2019 and 2028.

The Low-Income Housing Tax Credit (LIHTC) has played a crucial role in addressing the affordable housing shortage in the United States. Despite facing criticism and financial challenges, the program continues to provide significant benefits to low-income households. As policymakers consider future changes to the LIHTC, it is essential to balance the program’s cost with its impact on affordable housing availability and distributional equity. With ongoing efforts to improve and expand the LIHTC, the program remains a vital tool in the fight against housing insecurity.