The Urban Institute released two reports on the Low Income Housing Tax Credit (LIHTC), The Low-Income Housing Tax Credit: How it Works and Who it Serves and The Low-Income Housing Tax Credit: Past Achievements, Future Challenges. The reports show that the LIHTC program plays an important role in providing affordable housing, consistently producing new units and preserving existing stock. The LIHTC program, however, faces structural and economic challenges that must be addressed to maximize its effectiveness.
LIHTC is the longest-running national affordable rental housing program producing new units. The Tax Reform Act of 1986 created the LIHTC program to incentivize equity investments in affordable rental housing by awarding federal income tax credits to private investors in exchange for capital to cover development costs. Unlike other housing programs, LIHTC has enjoyed widespread political support. The program has created or preserved 37,727 properties and roughly 2.3 million units - more than any other construction and preservation program operating today. LIHTC has played an increasingly important role in production and preservation as funding for other federal housing programs has declined.
Despite its popularity, LIHTC falls short in several critical areas. First, LIHTC investment does not permanently address affordability problems - properties are only required to be affordable for up to 30 years. The report cites an NLIHC estimate that more than 115,000 units could expire in the next five years. Additionally, LIHTC properties have struggled to meet the needs of extremely low income renters (those earning below the federal poverty level or 30% of the area median income, whichever is greater) without additional federal rental assistance. The lengthy and complicated tax credit allocation process is also inefficient, and projects have few incentives to bring down costs. Finally, LIHTC units are often concentrated in poorer and racially segregated neighborhoods. Community opposition to low income housing developments in their neighborhoods can exacerbate this pattern of development.
The study points to additional areas of concern - LIHTC’s reliance on other federal housing programs, its vulnerability to market changes, and its lack of timely data - that must be researched further and considered when developing longer-term policy solutions. The Great Recession greatly reduced the demand from investors for tax credits between 2007 and 2010, which led to a temporary but significant drop in LIHTC production and preservation. The 2017 “Tax Cuts and Jobs Act” (TCJA), which significantly reduced corporate tax rates, may weaken future demand for LIHTC. Additionally, the program’s success is dependent upon the success of other federal housing programs, as it often relies on other programs to fill in the gaps in project financing. Cuts to federal housing programs could significantly reduce LIHTC’s effectiveness and contribute to the overall decline in the supply of affordable housing stock. Finally, HUD’s LIHTC database was last updated in 2015, and includes an additional three- to four-year lag in data collection. This data limitation makes it difficult to study more recent LIHTC developments.
The Low-Income Housing Tax Credit: How it Works and Who it Serves is available at: https://urbn.is/2JmQBgw
The Low-Income Housing Tax Credit: Past Achievements, Future Challenges is available at: https://urbn.is/2LfvQoT