Despite the housing affordability challenges many low-income renters face, most government resources for preserving and building affordable rental housing have declined. This stagnation in federal housing assistance programs means that the Low-Income Housing Tax Credit (LIHTC), which provides a federal income tax credit to private investors in eligible projects, is the primary option for preserving and expanding the supply of affordable rental housing.
This report explores why LIHTC is a critical part of the housing safety net. We detail how and why the program has succeeded, the challenges it faces, and why the program is more important than ever.
LIHTC matters more than ever, but its future is uncertain
The Low-Income Housing Tax Credit has become the most enduring and prolific source of funding for new affordable rental units and a key resource for preserving public housing and other federally assisted housing units. Since its creation in 1987, LIHTC has created or preserved 37,727 unique properties and an estimated 2.3 million units. It works through the federal tax code and not the budget, funds more units than any other federal housing program, and enjoys bipartisan support.
But the Tax Cuts and Jobs Act (TCJA) passed in 2017 will have an uncertain effect on future LIHTC investments because reducing corporate income taxes lessens the financial incentive for corporations to make equity investments in tax credits. The Consolidated Appropriations Act of 2018 (the March 2018 omnibus appropriations bill) included a 12.5 percent increase in LIHTC allocations for the next four years, but it might not fill the gap created by the TCJA because it will have little effect on the pricing of credits and investor tax benefits and is not a permanent fix.
This uncertainty comes amid a deepening affordable rental housing crisis: only around 20 percent of households that qualify for housing assistance receives any. If LIHTC investments falter, developers will not build affordable rental housing and existing units will be lost.
LIHTC has played a crucial role in funding affordable housing, but context matters
We analyzed the distribution of LIHTC properties and units, focusing on newly constructed properties placed in service between 2000 and 2015. Here are the key findings from our analysis:
- LIHTC investments are critical to building new affordable rental units and preserving existing ones, but they are not permanent solutions. LIHTC provides affordable rental housing for millions of low-income families across the country, but LIHTC is not structured as a permanent investment, and properties are only required to be affordable for up to 30 years. As of 2015, an estimated 2 million units remain active, but nearly 50,000 units have left the program, and another nearly 200,000 units had an inconclusive program status. Because units are not tracked beyond their compliance period, it is unknown whether these units are still affordable.
- LIHTC is critical to rural communities that may be most vulnerable to any decline in program investments. In 3 percent of US counties, more 10 percent of rental units are financed by LIHTC. These 51 counties, mostly rural communities, have larger-than-average shares of black or Hispanic residents and higher poverty and unemployment rates.
- LIHTC production and preservation slowed dramatically during the Great Recession, falling 47 percent from a program peak of 116,175 units in 2004 down to 61,400 units in 2010. Although the program has recovered some since 2010, it is unclear whether recovery has been sustained or has improved.
- If LIHTC investments slow in the future, innovative programs might help fill the gap. The American Recovery and Reinvestment Act of 2009 authorized two programs to offset declining LIHTC investments during the downturn: the Tax Credit Exchange Program, which financed 911 active LIHTC properties and 73,580 low-income units, and the Tax Credit Assistance Program, which financed 859 active LIHTC properties and 62,279 units between 2010 and 2015. Given the extent of the downturn, it is reasonable to assume that LIHTC production and preservation numbers would have been worse without these programs.
What’s ahead for LIHTC
The Low-Income Housing Tax Credits’ public-private partnership model makes it vulnerable to market shifts and changes in tax policy. These are a few key lessons and concerns to note as we look to the future:
- The fate of LIHTC is intertwined with other federal housing programs. LIHTC frequently relies on other federal housing programs, including the HOME Investment Partnerships Program and the Community Development Block Grant program, to fill gaps in project financing. Cutting other federal housing programs could decrease future investment in LIHTC, which would contribute to the overall declining supply of affordable rental housing, especially for low-income households.
- Economic recessions or other conditions that could give equity investors cold feet threaten LIHTC production. Tax credit production declined during the Great Recession. Although the federal government stepped in to sustain LIHTC production, private-sector investment is key to the program’s long-term sustainability. If the incentive structure for corporate investment in LIHTC changes, as is the case in the TCJA, the program’s output and sustainability might also change.
- To adequately track changes in output, we need to overcome data limitations. The US Department of Housing and Urban Development’s LIHTC database was last updated in 2015, and that update lags three to four additional years. Data limitations stymie efforts to evaluate the program, and poor tracking of LIHTC investments erodes investor and taxpayer confidence that their money is being wisely invested. One solution would be to increase reporting requirements to track all projects annually and to expand the data requested.