The Low-Income Housing Tax Credit: Policy Issues

The Low-Income Housing Tax Credit: Policy Issues

October 17, 2019
The Low-Income Housing Tax Credit: Policy Issues
The low-income housing tax credit (LIHTC) program is the
however, are state and local housing finance agencies
federal government’s primary policy tool for the
(HFAs). HFAs screen applications to determine which
development of affordable rental housing. The program
developers receive an award of credits. Delegating this
awards developers federal tax credits to offset the cost of
authority to HFAs gives each state the flexibility to address
producing affordable rental housing for low-income
its individual housing needs, which is important given the
tenants. The program, which was created by the Tax
local nature of housing markets. It also reduces the federal
Reform Act of 1986 (P.L. 99-514), is estimated to cost the
government’s oversight role since HFAs are also charged
government an average of approximately $9.9 billion
with containing costs and monitoring projects to ensure
annually. Proposals in the 116th Congress would modify the
they are compliant with the program rules.
LIHTC program, some of which would expand the program
and increase its cost.
The federal government’s principal housing agency, the
Department of Housing and Urban Development (HUD),
This In Focus provides a brief overview of the LIHTC
has no direct oversight of the program unless other HUD
program and discusses select policy issues. For more
subsidies are involved. HUD is involved in some indirect
detailed information on the program, please see CRS
aspects of the program’s administration since it determines
Report RS22389, An Introduction to the Low-Income
area median income (AMI), which governs who can reside
Housing Tax Credit, by Mark P. Keightley.
in an LIHTC property, and what rent may be charged. HUD
also designates Difficult Development Areas (DDAs) and
Overview of the Program
Qualified Census Tracts (QCTs), which are used to
LIHTCs are federal tax credits awarded to developers to
determine if an LIHTC property qualifies for extra tax
offset construction costs in exchange for agreeing to reserve
credits. Additionally, HUD maintains some data on the
a fraction of rent-restricted units for lower-income
program.
households. The tax credits are claimed over a 10-year
period. Because developers need upfront financing to
Selected Policy Issues Facing Congress
complete construction, they typically sell the 10-year
stream of tax credits to outside investors (e.g., corporations,
Affordable Housing Supply
financial institutions) in exchange for equity financing.
Since 1987, the LIHTC program has created just over 3
million affordable rental units. An important question when
Investors require a return in exchange for providing capital,
evaluating the success of the program is whether these 3
which diverts a portion of each tax credit away from
million units have expanded the net affordable housing
subsidizing construction costs. An investor, for example,
supply, or whether they have replaced (“crowded out”)
may agree to contribute $0.90 in equity financing per $1.00
affordable housing the private market would have otherwise
tax credit they receive. This would mean that $0.10 of the
provided as existing units aged, existing properties were
tax credit did not go toward subsidizing construction costs.
offered for rent, and developers increased the supply of
The complexity of these transactions may also require
housing more generally.
overhead costs (e.g., lawyers, accountants, and syndicators)
exceeding those incurred in developing market-rate
Economic theory predicts that researchers should find
housing, further reducing the effective subsidy.
varying degrees of crowding out given the unique features
of each housing market, particularly each one’s ability to
Outside investors and others play an important role in
accommodate additional construction. The empirical
evaluating the quality of proposed projects, as well as
research indicates that not all LIHTC construction can be
providing oversight and compliance monitoring after
considered net additions to the affordable housing stock.
construction is complete. Effectively, the LIHTC
The findings range from little crowding out to nearly 100%,
mechanism outsources a portion of the oversight and
and depend on the market examined, the data used, and the
compliance monitoring to investors in exchange for a
methodological approach of the researchers.
financial return. The reduced oversight and compliance
burden may be valuable to the federal government, but it is
Quality of Housing
an unresolved empirical question whether the return earned
Another important component in evaluating the success of
by investors and others is justified by the service they
the LIHTC program is whether it increases quality of the
provide.
affordable housing supply. Given that LIHTC construction
involves either new units or significantly rehabilitated units,
The LIHTC is a provision of the tax code and is therefore
it is likely that LIHTC results initially in higher-quality
under the oversight of the Internal Revenue Service (IRS).
housing along at least one dimension: physical features and
The primary administrators of the LIHTC program,
amenities. Rent controls, though, like those present in the
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The Low-Income Housing Tax Credit: Policy Issues
LIHTC program, may affect the ability and incentive to
Oversight
maintain the physical quality over time.
As previously discussed, the administration of the LIHTC
program has been primarily delegated to HFAs, although
The neighborhood a property is located in may be
the IRS is the federal agency responsible for overseeing the
considered another aspect of housing quality. A property
program. By design, investors and other interested parties
located in a neighborhood with low crime and access to
share in oversight and monitoring. If additional government
public resources and services, good schools, and proximity
subsidies are involved, then properties may be subject to
to employment—a high-opportunity neighborhood—can be
monitoring requirements under the rules of those programs.
considered of higher quality than a property located in an
area lacking these opportunities. Research tends to indicate
LIHTC properties experience extremely low rates of
that the LIHTC program has not been particularly
foreclosure, and investors are rarely required to forfeit or
successful in providing housing in high-opportunity
repay tax credits due to compliance violations. This fact is
neighborhoods, and that LIHTC units are often located in
often referenced by program advocates in asserting that
neighborhoods with less opportunity than other rental units.
investors and HFAs provide useful oversight of the
The one exception is that LIHTC units may be located in
program. However, investor oversight ends 15 years after a
neighborhoods with better transit access.
property is awarded tax credits because investors are no
longer under the threat of losing or repaying credits. HFAs
Production versus Tenant Subsidies
also require developers to submit audited cost statements,
Traditionally, economists have generally questioned the
but as is true in other industries, occasionally fraud may
cost effectiveness of housing production subsidies like
occur.
LIHTC. The skepticism is partly because production
subsidies incentivize constructing new properties (or
With respect to federal oversight, a 2015 Government
substantially rehabilitating existing ones), which is an
Accountability Office (GAO) study found that the IRS
expensive way to provide shelter. An alternative argument
provided very little oversight of the program. GAO
is that affordable housing can be increased by subsidizing
determined that the IRS has conducted only seven audits of
tenants’ incomes— for example, by providing individuals
state and local HFAs since 1986. GAO attributed part of the
with a rental voucher. Individuals, in turn, are able to secure
lack of oversight to the fact that the IRS is not a housing
housing from currently available properties or ones that
agency and does not view the program as being in line with
become available in response to the demand for housing at
its primary mission or use of resources. GAO recommended
higher rents.
that Congress designate HUD as a joint administrator of the
program.
A few recent studies examined the cost effectiveness of
production versus tenant housing subsidies. They typically
Data Availability and Collection
have found tenant subsidies to be more cost effective, but
The IRS collects and reports little data on the LIHTC
the degree to which this is true depends on the specific
program. In comments made in response to a 2018 GAO
market. Additionally, construction subsidies may be cost
report, the IRS stated that its statutory authority to collect
effective in certain instances. For example, subsidizing the
data on the program is limited and that it “collects data only
construction of housing for groups with special needs may
to the extent necessary for tax administration.” The IRS
be most cost effective because locating these individuals
also mentioned that tax administration does not involve
together makes it easier and less expensive to provide
evaluating tax provisions that serve a nontax purpose.
supportive services. In the end, affordable housing policy
would benefit from a comprehensive analysis of the cost
HUD voluntarily publishes LIHTC project-level data and
effectiveness of the two approaches.
was mandated by the Housing and Economic Recovery Act
of 2008 (HERA; P.L. 110-289) to report information on
Amount of Subsidization
specific tenant characteristics. HERA authorized $6.1
The LIHTC program subsidizes up to 30% or 70% of
million to assist HUD in collecting tenants’ data, but the
eligible costs, depending on whether tax-exempt bond
funding was never appropriated. Providing this funding
financing is also used. These subsidy rates can increase up
would likely assist HUD in satisfying its mandate and
to 39% and 91%, respectively, for construction in a DDA or
improving on its already valuable data.
QCT. Little research has attempted to determine if these
LIHTC subsidy rates are appropriate. Part of the difficulty
Data not currently collected that would be useful in
in studying this issue is isolating the effect of the LIHTC
studying the program include information on construction
from multiple other layers of subsidization. In addition to
and land costs; fees paid to developers, syndicators, and
tax-exempt bond financing, developers may also rely on the
other parties involved; prices paid for tax credits; operating
federal historic rehabilitation tax credit, HOME Investment
revenues and expenses; other noncredit claims investors
Partnerships Program (HOME) grants, Community
receive; and a complete picture of financing sources,
Development Block Grant (CDBG) funds, National
including other federal and state subsidies, among other
Housing Trust Fund assistance, the U.S. Department of
data items. Data that tracked the outcomes of properties and
Agriculture (USDA) Section 515 Rural Rental Housing
tenants over time would also be useful.
Loan program, as well as state tax incentives and financial
assistance. Additionally, tenants may also be receiving
Mark P. Keightley, Specialist in Economics
rental assistance such as Section 8 vouchers.
IF11335
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The Low-Income Housing Tax Credit: Policy Issues

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