Building a Better Low-Income Housing Tax Credit

The nation's housing policy is slated to undergo substantial remodeling in the wake of the 2008 financial crisis. As policymakers reconsider the longstanding goal of expanding home ownership and look for new ways to expand the supply and improve the quality of low income housing, they are likely to employ rental housing policy as a central component of a revised affordable housing strategy. The Department of Housing and Urban Development's 2010-2015 Strategic Plan lists the promotion of affordable rental housing as the second of five strategic housing policy goals over the next five years.[1] The plan, which details a need to "expand the supply of quality affordable rental housing," could bring new attention to the primary federal program for supplying rental housing, the federal low-income housing tax credit (LIHTC).[2]

The LIHTC provides a subsidy for the construction of low-income multifamily housing units. The credit, which the federal government allocates to state housing finance agencies, is distributed to qualified builders who in turntransfer the credits to investors in exchange for project financing. The investors reduce their federal tax liability with the credits over the subsequent 10-year period. Each year roughly 1,400 projects and 103,000 units are produced under the LIHTC program, and the credit has accounted for roughly one-third of multifamily rental construction in recent years. Since the program's inception in 1986, more than 1.7 million units have been placed into service.[3]

In this article, I examine possible improvements to the LIHTC program. I propose two changes that would enable the LIHTC to better promote the federal housing policy goal of poverty deconcentration. First, limiting the number of LIHTC units per project would promote incomemixing among LIHTC properties. Second, current law grants enhanced credits to projects that are located in low-income census tracts and requires states to give preference to projects that are located in the same areas. I recommend that federal policy be neutral toward project location because placing low-income units in high poverty areas contradicts the goal of poverty concentration. I also propose changes that would target the credit to states according to need by distributing them based on per capita income and poverty, rather than population.

Click here to read the full paper as an Adobe Acrobat PDF.

Amy Roden is a Jacobs Associate and the program manager of economic policy studies at AEI.

Photo Credit: iStockphoto/dra_schwartz

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