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The low-income housing tax credit (LIHTC) program is one of the federal government's primary policy toolstool for encouraging the development and rehabilitation of affordable rental housing. These nonrefundable federal housing tax credits are awarded to developers of qualified rental projects via a competitive application process administered by state housing finance authorities. Developers typically sell their tax credits to outside investors in exchange for equity in the project. Selling the tax credits reduces the debt developers would otherwise have to incur and the equity they would otherwise have to contribute. With lower financing costs, tax credit properties can potentially offer lower,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 and 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 (e.g., corporations, 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 government an average of approximately $9.98 billion annually.
In late 2017, there was a revision to the Internal Revenue Code (P.L. 115-97) that substantially changed the federal tax system. The revision did not directly alter the LIHTC program; however, there had been early reports of downward pressure on tax credit demand stemming from the 2017 tax revision.
Most recently, the 2018 Consolidated Appropriations Act (P.L. 115-141) made two changes to the LIHTC program. FirstThe 2018 Consolidated Appropriations Act (P.L. 115-141) made two changes to the LIHTC program. First, the act increased the amount of credits available to states each year by 12.5% for years 2018 through 2021. This modification appeared to be in response to concerns over the effects of P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA). The changes made by TCJA did not directly alter the LIHTC program; however, the act reduced corporate taxes, which had the potential to reduce demand for LIHTCs. Second, the act modified the so-called "income test," which determines the maximum income an LIHTC tenant may have. Previously, each individual tenant was required to have an income below one of two threshold options (either 50% or 60% of area median gross income [AMI], depending on an election made by the property owner). With the modification, property owners may use a third income test option that allows them to average the income of tenants when determining whether the income restriction is satisfied. Second, the act also increased the amount of credits available to states each year by 12.5% for years 2018 through 2021.
This report will be updated as warranted by legislative changes.
The low-income housing tax credit (LIHTC) was created by the Tax Reform Act of 1986 (P.L. 99-514) to provide an incentive for the development and rehabilitation of affordable rental housing. These federal housing tax credits are awarded to developers of qualified projects via a competitive application process administered by state housing finance authorities (HFAs). Developers either use the credits or sell them to investors to raise capital for real estate projects, which, in turn, reduces the debt or equity contribution that would otherwise be required of developers. With lower financing costs, tax credit properties can potentially expand the supply of affordable rental housing. The LIHTC is estimated to cost the government an average of $9.9 billion annually.1
Two types of LIHTCs are available depending on the nature of the construction project. The so-called 9% credit is generally reserved for new construction, while the so-called 4% credit is typically used for rehabilitation projects and new construction that is financed with tax-exempt bonds.2 Each year, for 10 years, a tax credit equal to roughly 4% or 9% of a project's qualified basis (cost of construction) is claimed. The applicable credit rates have historically not actually been 4% and 9%. Instead, the credit rates have fluctuated in response to market interest movements so that the program has delivered a subsidy equal to 30% of the present value of a project's qualified basis in the case of the 4% credit, and 70% in the case of the 9% credit. For both the 4% and 9% credit it is the subsidy levels (30% or 70%) that are explicitly specified in the Internal Revenue Code (IRC), not the credit rates. Since 1986, the 4% rate has ranged between 3.15% and 3.97%, and the 9% credit between 7.35% and 9.27%.3 Since 2008, however, there has been a floor under the 9% credit below which the new construction credit rate cannot fall.
Most recently, to assist certain areas of California that were affected by natural disasters in 2017 and 2018, the Further Consolidated Appropriations Act, 2020 (P.L. 116-94) increased California's 2020 LIHTC allocation by the lesser of the state's 2020 LIHTC allocations to buildings located in qualified 2017 and 2018 California disaster areas, or 50% of the state's combined 2017 and 2018 total LIHTC allocations. There have also been a number of bills introduced in the 116th Congress that would make targeted changes to the LIHTC program. These proposals include H.R. 4984, H.R. 4865 and S. 767, H.R. 4689, H.R. 3479 and S. 1956, and H.R. 3478. Broader changes to the program have been proposed by the Affordable Housing Credit Improvement Act of 2019 (H.R. 3077/S. 1703). The low-income housing tax credit (LIHTC) program, which was created by the Tax Reform Act of 1986 (P.L. 99-514), is the federal government's primary policy tool for the development of affordable rental housing. LIHTCs are awarded to developers to offset the cost of constructing rental housing in exchange for agreeing to reserve a fraction of rent-restricted units for lower-income households. Though a federal tax incentive, the program is primarily administered by state housing finance agencies (HFAs) that award tax credits to developers. Developers may claim the tax credits in equal amounts over 10 years once a property is "placed in service," which means it is completed and available to be rented. Due to the need for upfront financing to complete construction, developers typically sell the 10-year stream of tax credits to outside investors (e.g., corporations, financial institutions) in exchange for equity financing. The equity that is raised reduces the amount of debt and other funding that would otherwise be required. With lower financing costs, it becomes financially feasible for tax credit properties to charge lower rents, and thus, potentially expand the supply of affordable rental housing. The LIHTC program is estimated to cost the government an average of $9.8 billion annually.1 There are two types of LIHTCs available to developers. The so-called 9% credit is generally reserved for new construction and is intended to deliver up to a 70% subsidy. The so-called 4% credit is typically used for rehabilitation projects utilizing at least 50% in federally tax-exempt bond financing and is designed to deliver up to a 30% subsidy. This report will also refer to the 4% credit as the "rehabilitation tax credit" and the 9% credit as the "new construction tax credit" to facilitate the discussion.2 The 30% and 70% subsidy levels are computed as the present value of the 10-year stream of tax credits divided by the development's qualified basis (roughly the cost of construction excluding land).3 It is the subsidy levels (30% or 70%) and not the credit rates (4% or 9%) that are explicitly specified in the Internal Revenue Code (IRC).4 Because two different subsidy levels are possible, the formula produces two different tax credit rates—the nominal 4% credit rate to ensure the 30% rehabilitation subsidy, and the nominal 9% credit rate to ensure the 70% subsidy for new construction. Once the effective credit rate has been determined, it is multiplied by the development's qualified basis to obtain the amount of LIHTCs a project will receive each year for 10 years. The credit rate stays constant throughout the 10-year period for a given development, but varies across LIHTC developments depending on when construction occurred and the prevailing interest rate at that time. The rehabilitation and new construction tax credits have ordinarily not been 4% and 9%. The Tax Reform Act of 1986 (P.L. 99-514) specified that buildings placed in service in 1987 were to receive exactly a 4% or 9% credit rate. Buildings placed in service after 1987 were to receive the credit rate that delivered the 30% and 70% subsidies as determined by Treasury's formula. The rehabilitation credit rate has been below 4% every month since January 1988.6 The new construction credit rate had similarly been below its nominal 9% rate every month since January 1991 until the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289) placed a temporary "floor" under the new construction credit preventing it from being set at less than 9%. The floor originally applied to developments completed in August 2008 through the end of 2013.7 Following a number of temporary extensions, the floor became a permanent feature of the program in 2015 with enactment of the Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-113).8 The effect of the floor depends on how far the tax credit rate determined by Treasury is from 9%. The floor has no effect if the credit rate produced by Treasury's formula is 9% or greater; the credit rate will be determined by Treasury's formula and generate a subsidy of up to 70%. If, however, the credit rate determined by Treasury is below the floor, then the credit rate is set equal to 9%. When this happens, new construction projects can potentially receive a subsidy above 70%, with the subsidy increasing the further the credit rate determined by Treasury's formula is below 9%.9 The current interest rate is the key factor determining whether the floor takes effect. Treasury's formula produces low credit rates when interest rates are low and higher credit rates when interest rates are high.10 In December 1990, when Treasury's formula last determined a credit rate above 9% (9.06%), the 10-year Treasury constant maturity rate was 8.08%.11 In January 2020, the rate was 1.81%.12 Thus, interest rates would need to increase significantly from current levels for the floor to no longer have an effect. A simplified example may help in understanding how the LIHTC program is intended to encourage affordable housing development. Consider a new affordable housing apartment complex with a qualified basis of $1 million. Since the project involves new construction it will qualify for the 9% credit and generate a stream of tax credits equal to $90,000 (9% × $1 million) per year for 10 years, or $900,000 in total. Under the appropriate interest rate the present value of the $900,000 stream of tax credits should be equal to $700,000, resulting in a 70% subsidy. The subsidy is intended to incentivize the development of affordable housing , but no tenant may have an income in excess of 80% of AMI.
Overview
The situation would be similar if the project involved rehabilitated construction except the developer would be entitled to a stream of tax credits equal to $40,000 (4% × $1 million) per year for 10 years, or $400,000 in total. The present value of the $400,000 stream of tax credits should be equal to $300,000, resulting in a 30% subsidy.
The process of allocating, awarding, and then claiming the LIHTC is complex and lengthy. The process begins at the federal level with each state receiving an annual LIHTC allocation in accordance with federal law. State housing agencies thenThe administration of the tax credit program is typically carried out by each state's housing finance agency (HFA). State HFAs allocate credits to developers of rental housing according to federally required, but state created, allocation plans. The process typically ends with developers selling allocatedawarded credits to outside investors in exchange for equity. A more detailed discussion of each level of the allocation process is presented below.
LIHTCs are first allocated to each state according to its population. In 20192020, states received anwill receive LIHTC allocation of $2.75625authority equal to $2.8125 per person, with a minimum small population state allocation of $3,166,875.4217,500.13 These amountsfigures reflect a temporary increase in the amount of credits each state received as a result of the 2018 Consolidated Appropriations Act (P.L. 115-141). The increase is equal to 12.5% above what states would have received absent P.L. 115-141, and is in effect through 2021. The state allocation limits do not apply to the 4% credits, which are automatically packaged with tax-exempt bond financed projects.5 The administration of the tax credit program is typically carried out by each state's Housing Finance Agency (HFA).
State HFAs allocate credits to developers of eligible rental housing according to federally required, but state created, Qualified Allocation Plansqualified allocation plans (QAPs). Federal law requires that thea QAP give priority to projects that serve the lowest-income households and that remain affordable for the longest period of time. Many states have two allocation periods per year. Developers apply for the credits by proposing plans to state agencies. Types of developers include nonprofit organizations, for-profit organizations, joint ventures, partnerships, limited partnerships, trusts, corporations, and limited liability corporations.
An allocation to a developer does not imply that all allocated tax credits will be claimed. An allocation simply means tax credits are set aside for a developer. Once a developer receives an allocation it generally has twohas several years to complete its project.15 Credits may not be claimed until a project is completed and occupied, also known as "property is placed in service." Tax credits that are not allocated by states after two years are added to a national pool and then redistributed to states that apply for the excess credits. To be eligible for an excess credit allocation, a state must have allocated its entire previous allotment of tax credits. This use-or-lose feature gives states an incentive to allocate all of their tax credits to developers.
In order toTo be eligible for an LIHTC allocation, properties are required to meet certain tests that restrict both the amount of rent that is assessed to tenantsmay be charged and the income of eligible tenants. Historically, the "income test" for a qualified low-income housing project has required project owners to irrevocably elect one of two income -level tests, either a 20-50 test or a 40-60 test. In order toTo satisfy the first test, at least 20% of the units must be occupied by individuals with income of 50% or less of the area's median gross income (AMI), adjusted for family size. To satisfy the second test, at least 40% of the units must be occupied by individuals with income of 60% or less of the area's median gross incomeAMI, adjusted for family size.616
The 2018 Consolidated Appropriations Act (P.L. 115-141) added a third income test option that allows owners to average the income of tenants. Specifically, under the income averaging option, the income test is satisfied if at least 40% of the units are occupied by tenants with an average income of no greater than 60% of AMI, and no individual tenant has an income exceeding 80% of AMI. Thus, for example, renting to someone with an income equal to 80% of AMI would also require renting to someone with an income no greater than 40% of AMI, so the tenants would have an average income equal to 60% of AMI.
In addition to the income test, a qualified low-income housing project must also meet the "gross rents test" by ensuring rents (adjusted for bedroom size) do not exceed 30% of the elected 50% or 60% of area median gross incomeAMI, depending on which income test option the project elected.7
The types of projects eligible for the LIHTC are apartmentinclude rental housing located in multifamily buildings, single-family dwellings, duplexes, and townhouses. Projects may include more than one building. Tax credit project types also vary by the type of tenants served. Housing can be for families or special needs populations including the elderly.
Enhanced LIHTCs are available for; for example, LIHTC properties may be designated as housing persons who are elderly or have disabilities.
Properties located in difficult development areas (DDAs) andor qualified census tracts (QCTs) are eligible to receive a "basis boost" as an incentive tofor developers to invest in more distressed areas: areas where the need is greatest for affordable housing, but which can be the most difficult to develop.8. In these distressed areas, the LIHTC can be claimed for 130% (instead of the normal 100%) of the project's total cost excluding land costseligible basis. This also means that available credits can be increased by up to 30%. HERA (P.L. 110-289) enacted changes that allow an HFA to classify any nontax exempt bond financed LIHTC projectLIHTC project that is not financed with tax-exempt bonds as difficult to develop, and hence, eligible for the enhanced credit.
Upon receipt of an LIHTC allocation, developers typically exchange the tax credits for equity. For-profit developers can either retain tax credits as financing for projects or sell them to investors; nonprofit developers sell tax credits. Taxpayers claiming the tax credits are usually investors, not developers. The tax credits cannot be claimed until the real estate development is complete and operable. This means that more than a year or two could pass between the time of the tax credit allocation and the time the credit is claimed. If, for example, a project were completed in July of 2018, depending on the filing period of the investor, the tax credits may not begin to be claimed until sometime in 2019.
Trading tax credits, or selling them, refers to the process of exchanging tax credits for equity investment in real estate projects. Developers recruit investors to provide equity to fund development projects and offer the tax credits to those investors in exchange for their commitment. When credits are sold, the sale is usually structured withaward, developers typically exchange or "sell" the tax credits for equity investment in the real estate project. The "sale" of credits occurs within a partnership that legally binds the two parties to satisfy federal tax requirements that the tax credit claimant have an ownership interest in the underlying property. This makes the trading of tax credits different than the trading of corporate stock, which occurs between two unrelated parties on an exchange. The partnership form also allows income (or losses), deductions, and other tax items to be allocated directly to the individual partners.18
The sale is usually structured using a limited partnership between the developer and the investor, and sometimes administered by syndicators who must adhere to the complex provisions of the tax code.9. As the general partner, the developer has a veryrelatively small ownership percentage but maintains the authority to build and run the project on a day-to-day basis. The investor, as a limited partner, has a large ownership percentage with an otherwise passive role. Syndicators charge a fee for overseeing the investment transactions.
Typically, investors do not expect their equity investment in a project to produce income. Instead, investors look to the credits, which will be used to offset their income tax liabilities, as their return on investment. The return investors receive is determined in part by the market price of the tax credits. The market price of tax credits fluctuates, but in normal economic conditions the price typically ranges from the mid-$0.80s to low-$0.90s per $1.00 tax credit. The larger the difference between the market price of the credits and their face value ($1.00), the larger the return to investors. The investor can also Investors also often receive tax benefits related to any tax losses generated through the project's operating costs, interest on its debt, and deductions such as depreciation.
The type of tax credit investor has changed over the life of the LIHTC. Upon the introduction of the LIHTC in 1986, public partnerships were the primary source of equity investment in tax credit projects, but diminished profit margins have driven some syndicators out of the retail investment market. Although there are individual tax credit investors, in recent years, the The right to claim tax benefits in addition to the tax credits will affect the price investors are willing to pay.
The vast majority of investors have come fromare corporations, either investing directly or through private partnerships.10
Different types of investors have different motivations for investing in tax credits. Some investors are motivated by Financial firms are large investors in LIHTC. Partly this is due to the Community Reinvestment Act (CRA), which considers LIHTC investments favorably.1119 Other investors include real estate, insurance, utility, and manufacturing firms, many of which list the rate of return on investment as their primary purpose for investing in tax credits. Tax sheltering is the second-most highly ranked purpose for investing.12
The LIHTC finances part of the total cost of many projects rather than the full cost and, as a result, must be combined with other resources. The financial resources that may be used in conjunction with the LIHTC include conventional mortgage loans provided by private lenders and alternative financing and grants from public or private sources. Individual states provide financing as well, some of which may be in the form of state tax credits modeled after the federal provision. Additionally, some LIHTC projects may have tenants who receive other government subsidies such as housing vouchers.
In late 2017, there was a revision to the Internal Revenue Code (P.L. 115-97) that substantially changed the federal tax system. The revision did not directly alter the LIHTC program; however, the reduction in corporate taxes, along with the limits on deducting net operating losses that were part of the act, led affordable housing advocates at the time to voice concern about a reduction in the demand for LIHTCs.
Most recently, the 2018 Consolidated Appropriations Act (P.L. 115-141) made two changes to the LIHTC program. As was discussed in the "The Allocation Process" section, the act modified the so-called "income test" to allow for income averaging across tenants, and also increased the amount of credits available to states each year by 12.5% for years 2018 through 2021. These changes may have helped alleviate some concerns stemming from the 2017 tax revision's potential effect on LIHTC development.13 Still, it is not yet clear what, if any, impact there may be on the affordable housing supply in the long run as the result of these recent changes to the federal tax code.
Author Contact Information
| 1. |
Computed as the average estimated tax expenditure associated with the program between 2018 and 2022. U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2018-2022, committee print, 116th Cong., 1st sess., October 4, 2018, JCX-81-18. |
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| 2. |
A developer using federal tax-exempt bonds can qualify for the 9% credit if they reduce the project's eligible basis by the amount of the tax-exempt bond subsidy. |
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| 3. |
The lower bound of this range is the rate that would have prevailed in absence of the 9% credit floor. U.S. Department of the Treasury, Internal Revenue Service, Revenue Ruling 2016-18, Table 4, Appropriate Percentages Under Section 42(b)(2) for August 2016, and Novogradac & Company LLP, "Appendix H: List of Monthly Credit Percentages," in Low-Income Housing Tax Credit Handbook, 2006 ed. (2006), p. 845. The 4% and 9% credits also hit these lower bounds in September, 2012. |
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| 4. |
From 1986 through 2000, the initial credit allocation amount was $1.25 per capita. The allocation was increased to $1.50 in 2001, to $1.75 in 2002 and 2003, and indexed for inflation annually thereafter. The initial minimum tax credit ceiling for small states was $2,000,000, and was indexed for inflation annually after 2003. |
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| 5. |
Tax-exempt bonds are issued subject to a private activity bond volume limit per state. For more information, see CRS Report RL31457, Private Activity Bonds: An Introduction, by Steven Maguire and Joseph S. Hughes. |
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| 6. |
Internal Revenue Code (IRC) §42(g)(1). |
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| 7. |
IRC §42(g)(2). |
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| 8. |
IRC §42(d)(5). |
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| 9. |
Syndicators are intermediaries who exist almost exclusively to administer tax credit deals. In the early years of the LIHTC, syndicators were more prevalent. In later years, as the number of corporate investors in the LIHTC grew and interacted directly with developers, the role of syndicators diminished. |
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| 10. |
HousingFinance.com, "Corporate Investment and the Future of Tax Credits: What Should You Expect," at http://www.housingfinance.com/news/corporate-investment-and-the-future-of-tax-credits-what-should-you-expect_o, January 1, 2011. |
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| 11. |
For more information on the LIHTC program and the CRA, see Office of the Comptroller of the Currency, Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks, Washington, DC, April 2014, http://www.occ.gov/topics/community-affairs/publications/insights/insights-low-income-housing-tax-credits.pdf. |
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| 12. |
Jean L. Cummings and Denise DiPasquale, "Building Affordable Housing: An Analysis of the Low-Income Housing Tax Credit," City Research, 1998, p. 33. |
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| 13. | Bendix Anderson, "Investors Pay More than Anticipated for LIHTCs, Easing Developers' Funding Fears," National Real Estate Investor, January 29, 2019, https://www.nreionline.com/multifamily/investors-pay-more-anticipated-lihtcs-easing-developers-funding-fears. A number of bills introduced in the 116th Congress would make targeted changes to the LIHTC program. These proposals include H.R. 4984, which would remove the high housing cost adjustment used in certain areas when computing AMI unless a jurisdiction petitioned for its use, and require developers to disclose information on expenditures, profits, syndication fees, projected rents, and any other information deemed reasonably necessary to monitor compliance; H.R. 4865 and S. 767, which would allow homeless youth and veterans who are full-time students to reside in LIHTC properties if they otherwise qualify; H.R. 4689, which would require states to give preference in their QAPs for buildings that do not permit smoking; H.R. 3479 and S. 1956, which would repeal the qualified contract option which allows owners to exit the program after 15 years; and H.R. 3478, which would allow for certain buildings that have participated in the program within the last 10 years to qualify for credits.20 Broader changes to the program have been proposed by the Affordable Housing Credit Improvement Act of 2019 (H.R. 3077/S. 1703). Among the more significant changes, the act would increase the amount of tax credits states receive; create a floor under the 4% credit; allow properties utilizing tax-exempt bond financing to more easily use the new income averaging test; provide clarity about the period in which a property that experiences a causality loss must return to service; eliminate the restriction that no more than 20% of the population in a metropolitan area can reside in a QCT (properties in a QCT receive a 30% basis boost); increase from 20% to 30% the fraction of the population in a metropolitan statistical area (MSA) or county that may reside in a DDA (properties in a DDA receive a 30% basis boost); provide a 50% basis boost for buildings in which at least 20% of units are occupied by tenants whose income does not exceed the greater of 30% of AMI or 100% of the federal poverty line, or for which an HFA has deemed needing such boost to be financially feasible; give HFAs the discretion to provide a 30% basis boost to properties utilizing tax-exempt bond financing if deemed necessary for financial feasibility; provide a 30% basis boost to rural properties; require states to include in their QAP consideration of the reasonableness of development costs; and change the name of the tax credit to the "Affordable Housing Tax Credit." The increase in the amount of tax credits that states would receive under the Affordable Housing Credit Improvement Act of 2019 would occur over a five-year period. Specifically, the proposal would set the per capita state amounts equal to $2.76 in 2019, $3.10 in 2020, $3.49 in 2021, $3.93 in 2022, $4.42 in 2023, and $4.96 thereafter and subsequently adjusted for inflation.21 The minimum small population state allocation would be similarly increased over a five-year period, reaching $5,700,468 in 2024, and would thereafter be adjusted for inflation. Relative to current law, it is estimated that the act would produce an 84% increase in the per capita credit amounts states would receive once the proposed changes were fully phased-in in 2024.22 This estimate of the increase in the per capita credit amounts is not an estimate of the increased cost of the program, which would be provided by the Joint Committee on Taxation (JCT). Appendix. Estimated Future Per Capita Tax Credit AmountsUnder current law, states receive tax credits equal to $2.8125 per capita in 2020, with a minimum small population state allocation of $3,217,500. These amounts reflect a temporary increase of 12.5% in the amount of credits each state receives through 2021 as a result of the 2018 Consolidated Appropriations Act (P.L. 115-141). Based on current law (i.e., where the current 12.5% increase expires after 2021) and the most recent CBO inflation projections, states are scheduled to receive an estimated $2.70 per capita in 2024 (see Table A-1). In 2024, the increase proposed by H.R. 3077/S. 1703 would be fully phased-in at $4.96 per capita, resulting in an estimated 84% ($4.96 divided by $2.70, minus 1) increase in per capita tax credit allocations under current law. Under current policy (i.e., assuming the 12.5% increase is permanent), it is estimated that H.R. 3077/S. 1703 would increase the per capita amounts by 63% ($4.96 divided by $3.04, minus 1) once fully phased-in (see Table A-1). From a budgetary cost perspective, current law is the relevant baseline for considering how much the Affordable Housing Credit Improvement Act of 2019 would expand the program. This is because the JCT, the official revenue estimator for tax legislation before Congress, uses the Congressional Budget Office's (CBO's) baseline to estimate the revenue effects of legislation. CBO is required by law to assume that spending and revenue policies continue or expire based on what is currently slated to occur in statute (i.e., current law).23 The estimated 84% increase in the per capita credit amounts does not imply that the JCT would estimate that H.R. 3077/S. 1703 will increase the cost of the LIHTC program by 84%. Revenue scores are estimated over a 10-year budget window. The per capita credit increase proposed by H.R. 3077/S. 1703 would phase-in over five years. During a portion of the phase-in period, the temporary 12.5% increase enacted by P.L. 115-141 would be in effect, which is one reason why a JCT score of the proposal would likely represent less than an 84% increase in the cost of the program. Additionally, the full increase of the per capita credit amounts under the act would not be in place during the entire 10-year budget period, also suggesting a JCT score of the proposal would likely represent less than an 84% increase in the cost of the program. Table A-1. Estimated Future Per Capita Tax Credit Amounts of Proposal, 2020-2029
|
Scenario
|
2020
|
2021
|
2022
|
2023
|
2024
|
2025
|
2026
|
2027
|
2028
|
2029
|
Current Law
|
$2.81
|
$2.87
|
$2.60
|
$2.65
|
$2.70
|
$2.75
|
$2.80
|
$2.85
|
$2.90
|
$2.95
|
$2.81
|
$2.87
|
$2.92
|
$2.98
|
$3.04
|
$3.09
|
$3.15
|
$3.21
|
$3.26
|
Proposalb
$3.32
|
$3.10
|
$3.49
|
$3.93
|
$4.42
|
$4.96
|
$5.05
|
$5.15
|
$5.25
|
$5.35
|
$5.45
|
% Increase of Proposal over Current Law
|
10.32%
|
21.60%
|
51.15%
|
66.79%
|
83.70%
|
83.64%
|
83.93%
|
84.21%
|
84.48%
|
84.75%
|
% Increase of Proposal over Current Policy
|
10.32%
|
21.60%
|
34.59%
|
48.32%
|
63.16%
|
63.43%
|
63.49%
|
63.55%
|
64.11%
|
64.16%
|
2.14%
|
2.31%
|
2.30%
|
2.29%
|
2.15%
|
2.09%
|
2.08%
|
2.08%
|
2.08%
|
2.08% Source: CRS estimates and the Affordable Housing Credit Improvement Act of 2019 (H.R. 3077/S. 1703). a. The figures for the proposal through 2024 are not estimates and are explicitly listed in H.R. 3077/S. 1703. b. IRC §42(h)(3)(ii) requires that inflation adjustments be rounded to the next-lowest $0.05. The rounding requirement is not in effect for the 12.5% temporary increase enacted by P.L. 115-141, and thus it is assumed that it would not continue to be in effect under current policy after 2021. c. All inflation adjustments were made using the CBO's forecast as of August 2019 for the percentage change in the Chained CPI-U in fiscal years 2019 through 2029. See https://www.cbo.gov/system/files/2019-08/51135-2019-08-economicprojections_1.xlsx.Author Contact Information Mark P. Keightley, Specialist in Economics
([email address scrubbed], [phone number scrubbed])
Footnotes1.
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Computed as the average estimated tax expenditure associated with the program between 2019 and 2023. U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2018-2022, committee print, December 18, 2019, JCX-55-18. 2.
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These labels represent generalizations about the use of the 4% and 9% credits and are a helpful way to think about the two different types of credits. The 9% credit is also commonly referred to as the "competitive credit" because awards of 9% credits are drawn from a state's annual LIHTC allocation authority and developers must compete for an award. The 4% credit is also commonly referred to as the "non-competitive credit" or "automatic credit" because developers do not have to compete for an award if at least 50% of the development is financed with tax-exempt bond financing; they are automatically awarded 4% tax credits. These 4% tax credits are not drawn from a state's annual LIHTC allocation authority. 3.
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The present value concept allows for the comparison of dollar amounts that are received at different points in time since, for example, a dollar received today has a different value than a dollar received in five years because of the opportunity to earn a return on investments. Effectively, a dollar received today and a dollar received in five years are in different currencies. The present value calculation converts dollar amounts received at different points in time into a common currency—today's dollars. 4.
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IRC §42(b). 5.
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The choice of interest rate will affect the credit rate that is needed to deliver the specified subsidy levels. IRC §42(b) requires that the Treasury Department use an interest rate equal to 72% of the average of the mid-term applicable federal rate and the long-term applicable federal rate. The mid- and long-term applicable federal rates are, in turn, based on the yields on U.S. Treasury securities. It could be argued that this interest rate, also known as the discount rate, should be higher because LIHTC investments are riskier than Treasury securities. If this were true, then the LIHTC credit rate determined using the interest rate specified in IRC §42(b) would result in subsidies less than the 30% and 70%. Because Congress defined the subsidy levels to be 30% and 70% using the interest rate specified in IRC §42(b), this report does not consider how the use of alternative discount rates would affect the program. 6.
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The 4% credit rate was 4% during the first year of the program. Since then the rate needed to produce the 30% subsidy has been below 4%. Novogradac & Company LLP, Low-Income Housing Tax Credit Handbook, 2006 ed. (Thomson West, 2006), pp. 845-850; Novogradac & Company LLP, "Tax Credit Percentages 2019," https://www.novoco.com/resource-centers/affordable-housing-tax-credits/data-tools/tax-credit-percentages-2019. 7.
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The floor technically applied to properties that were "placed in service" during that time period. 8.
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The floor was originally enacted on a temporary basis by the Housing and Economic Recovery Act of 2008 (P.L. 110-289) and applied only to new construction placed in service before December 31, 2013. The American Taxpayer Relief Act of 2012 (P.L. 112-240) extended the 9% floor for credit allocations made before January 1, 2014. The Tax Increase Prevention Act of 2014 (P.L. 113-295) retroactively extended the 9% floor through the end of 2014. Division Q of P.L. 114-113—the Protecting Americans from Tax Hikes Act (or "PATH" Act) permanently extended the 9% floor. 9.
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Treasury's formula is designed to produce the credit rate necessary to deliver a 70% subsidy. This credit rate can be, and often is, less than 9%. For example, the October 2019 tax credit rate for new construction as determined by Treasury's formula was 7.39%. In this case the floor took effect and the tax credit rate was increased to 9%. Since the credit rate is increased above what is needed to deliver a 70% subsidy (i.e., 7.39%), it means that the subsidy rises above 70% when the floor takes effect. 10.
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This relationship is an intrinsic feature of the present value formula, and not a result of a decision by Treasury in computing the credit rate. 11.
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Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis, January 8, 2020, https://fred.stlouisfed.org/series/DGS10. 12.
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Treasury does not directly use the interest rate on 10-year bonds, but as discussed in footnote 5, the interest rate used by Treasury is based on the yields on U.S. Treasury securities. 13.
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From 1986 through 2000, the initial credit allocation amount was $1.25 per capita. The allocation was increased to $1.50 in 2001, to $1.75 in 2002 and 2003, and indexed for inflation annually thereafter. The initial minimum tax credit ceiling for small states was $2,000,000, and was indexed for inflation annually after 2003. 14.
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Tax-exempt bonds are issued subject to a private activity bond volume limit per state. For more information, see CRS Report RL31457, Private Activity Bonds: An Introduction, by Steven Maguire and Joseph S. Hughes. 15.
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Developers must have the property placed in service in the calendar year an allocation is made. However, a developer can receive an extension which gives them an additional calendar year to have the property placed in service. To be granted this extension, known as a carryover allocation, at least 10% of anticipated costs must be incurred within the first calendar year. 16.
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Individual income levels are certified by each property manager, although states have some discretion over the specifics of the income verification method. LIHTC participants are prohibited from using HUD's Enterprise Income Verification (EIV) system to verify tenant income. The EIV system is required to be used in the Section 8 housing voucher program. 17.
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Rent includes utility costs. 18.
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For more details on the general tax equity mechanism, see CRS Report R45693, Tax Equity Financing: An Introduction and Policy Considerations, by Mark P. Keightley, Donald J. Marples, and Molly F. Sherlock. 19.
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For more information on the LIHTC program and the CRA, see Office of the Comptroller of the Currency, Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks, Washington, DC, April 2014, http://www.occ.gov/topics/community-affairs/publications/insights/insights-low-income-housing-tax-credits.pdf. 20.
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21.
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Some have described the increase in tax credits under H.R. 3077/S. 1703 as a 50% increase (adjusted for inflation) over current levels phased-in over five years, or 10% per year for five years. If compounding growth is factored in to the calculation, the 50% figure appears to understate the effect of increasing the credit amounts by 10% each year for five years. Specifically, a 10% increase per year for five years of any amount would, by itself, result in a total increase of 61%. Mathematically, the total effect of a 10% increase of any amount each year for five years is computed as 1.105 =1.61 (i.e., a 61% increase). 22.
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See the Appendix for details of this estimate and why current law is the relevant baseline for estimating how much the act would expand the program. Estimates relative to current policy are also provided.
23.
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Statutory requirements related to the calculation of the baseline can be found in The Balanced Budget and Emergency Deficit Control Act of 1985, as amended in §257, 2 U.S.C. 907. CBO's baseline is called the Budget and Economic Outlook. For more information on the JCT's revenue estimation process, see https://www.jct.gov/about-us/revenue-estimating.html. |