The Low-Income Housing Tax Credit: A Framework for Evaluation

Publication Date: March 2007

Publisher: Library of Congress. Congressional Research Service

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Research Area: Social conditions

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Abstract:

The Low-Income Housing Tax Credit (LIHTC) is an economic incentive to produce affordable rental housing. These federal housing tax credits are awarded to developers of qualified projects, who either use or sell the credits to investors to raise capital (or equity) for real estate projects. The tax benefit reduces the debt and/or equity financing that the developer would otherwise have to obtain. With lower financing costs, beneficiaries of tax credits can offer lower, more affordable rents. Proponents of the credit view the LIHTC as highly effective because of the more than one million rental units already financed by the credit.

Proponents also emphasize that the credit is responsible for the production of up to 50% of all multifamily housing starts in any given year. Opponents argue that the LIHTC is not effective or, at a minimum, far less effective than supporters claim because LIHTC units have supplanted other affordable rental housing and because the supply-side credit program is more costly than demand-side subsidies like the Section 8 Housing Voucher Program. Opponents also argue that the LIHTC program does not serve very-low-income households, who are often most in need of affordable housing.

As policy makers begin to address affordable-housing issues, modifications to the LIHTC are likely to be a focus of consideration. This report discusses some fundamental public policy questions raised by the LIHTC -- questions neither extensively explored nor resolved. Is the lack of affordable housing a result of a housing-market failure? Does the LIHTC address the affordable-housing problem? And, is the LIHTC efficient, or could it be improved? These questions are not definitively answered in economics literature.

Determining the size of the affordable-housing market may be of value. A national inventory system could be created to record information about the net gains (or losses) of affordable rental units. Also, to the extent the effectiveness of the LIHTC relies on the ability of state housing authorities to select marginal projects (those projects that, if not for the LIHTC, would not be developed), it could be useful to know whether states are selecting these projects. Do applicants who fail to win credit awards subsequently go on to build housing without the tax credit?

Congress may not alter the LIHTC program. As a tax expenditure, the program does not require an appropriation or reauthorization. Alternatively, Congress might modify the LIHTC program. Some attention has focused on the issue of examining the rules of the LIHTC program to determine where its compatibility with other housing finance programs can be increased. Other policy suggestions have included eliminating floating tax-credit rates and fixing them at the 9% and 4% rates. Policymakers have also discussed whether the LIHTC program could be modified to target affordable-housing production for households with very low income. Another option is to repeal the LIHTC program.

This report will be updated in the event of significant legislative or regulatory changes.