Low-Income Housing Tax Credit: a flawed, ineffective policy with unfulfilled promises | Opinion

Housing is a big issue right now, with a lot of strong opinions. But there’s one particular housing program that most experts agree fails to deliver: the Low-Income Housing Tax Credit, known as LIHTC and pronounced “lie-tech”. LIHTC is a fixture of development across the country, and it fails the two things it sets out to do: provide substantial affordable housing and do it cost efficiently.

LIHTC’s champions include politicians and developers because the program lets them look like they’re doing something. But evidence shows it’s another costly, ineffective federal program. Many states offer their own LIHTC programs, which also fail to deliver.

Established by Congress in 1986, LIHTC is a tool for building below-market rental housing nationwide. Although administered by state housing agencies, it is the federal government’s largest tax expenditure on affordable rental housing.

Here’s how it works: The program subsidizes private developers to build affordable housing by offering them tax credits. These can be sold to investors — typically banks or large corporations — in exchange for equity. Developers get capital for construction, meaning they take on less debt and can offer lower rents. Investors reduce their federal tax liabilities over 10 years while potentially fulfilling certain community investment obligations.

It sounds great. But legal fees and investor profits eat up a lot of the tax credit value. That means fewer dollars actually going toward construction. Taxpayers aren’t getting the full value of their investment.

Price inflation

Research has also found the program inflates prices. Since the amount of tax credits is based on total development costs, there is little incentive for developers to keep costs down. As per-unit costs rise, fewer affordable housing units can be built.

The guidelines for LIHTC are another concern for housing activists, who argue compellingly the program fails to benefit those most in need. This is because LIHTC’s standard for affordability is based on the area median income of a large area, such as a county, as opposed to a more narrowly defined poorer community. As a result, the developer can meet the affordability standard of the tax credit without actually helping those most in need.

Moreover, the affordability of LIHTC-subsidized units is temporary, usually lasting only 30 years. After that, the units can be converted to market-rate housing. As units age out of their affordability requirements, the stock of affordable housing diminishes, sometimes faster than it is replenished.

More than half of states have their own LIHTC programs, which award additional tax incentives to developers who qualify for the federal program. Economists Edgar Olsen and Bree Lang conclude in a yet-unpublished paper that developers receive so many subsidies from sources other than the federal government that “taxpayer cost of providing a subsidized unit through the LIHTC program in California was approximately three times larger than the cost of the federal tax credits alone.”

Another state that offers its own LIHTC program is Missouri. Implemented in 1992, Missouri now matches every dollar of federal LIHTC incentives, and its recent experience offers us a glimpse into the effectiveness of state LIHTC programs.

In 2017, the Show-Me State suspended its additional LIHTC program for two years. Developers claimed the extra state incentives were necessary because the federal credits alone weren’t enough to make affordable housing construction possible. But according to Elias Tsapelas of the Show-Me Institute, where I serve as a senior fellow, despite halving the available LIHTC incentives to Missouri builders, there was only a “moderate decline” in LIHTC applications. The Missouri Housing Development Commission “still received more than 100 project applications in both of those years … far above what could be awarded in a given year.”

Some ideas work better on paper than in practice. LIHTC doesn’t keep building costs low or provide affordable housing for those who need it most. At best, it permits politicians and developers the cover to claim they are meeting an important public policy need.

If housing is too expensive, policymakers must address the issues driving up costs. The Low-Income Housing Tax Credit, like so many other policies, merely throws taxpayer money at the problem. It’s not working.

Patrick Tuohey is co-founder of Better Cities Project, a 501(c)(3) nonprofit focused on municipal policy solutions, and a senior fellow at the Show-Me Institute, a 501(c)(3) nonprofit dedicated to Missouri state policy work.