Recent data show the United States is short by millions of homes. Amid this housing crisis, adding to the housing supply by providing new accessible, affordable housing is more important than ever.

Today, the Low-Income Housing Tax Credit (LIHTC) program plays a major role in filling this gap. It isn’t the only source of new construction funds for affordable rental housing in the country, but it is the largest by far. In a market dominated by single-family homes, LIHTC helps boost the multifamily supply. LIHTC funds tens of thousands of new apartments every year for tenants with low and moderate incomes, in addition to subsidizing the acquisition or improvement of many more. It has supported the construction or rehabilitation of nearly 3 million units since its creation.

But to address currently affordability needs, this still isn’t enough. Expanding the LIHTC program could help increase housing access for millions of more US residents.

How LIHTC works

LIHTC subsidizes the acquisition, construction, and rehabilitation of affordable rental housing. The US Internal Revenue Service (IRS) administers it by giving state housing finance agencies (plus Puerto Rico and select city agencies) the annual right to allocate tax credits against federal income taxes in exchange for private investment in housing. IRS allocations are based on state population, reserving a minimum for small states. Agencies allocate a large share of credits competitively through qualified allocation plans that define investment priorities.

LIHTC-financed housing, often developed by or in partnership with nonprofits, must guarantee at least 30 years of affordability for a share of units to households with average incomes at or below 60 percent of the metropolitan median income. Without LIHTC subsidies, most of the projects the program finances would be financially infeasible given the low incomes of their target residents. And LIHTC-financed projects add to the housing supply without competing with private-market housing in many parts of the country, which is largely affordable only to households with middle or high incomes.

State agencies support tens of thousands of units annually using LIHTC. According to National Council of State Housing Agencies data, they financed 156,000 units in 2021—95 percent of which were affordable to people making low or moderate incomes.

Despite considerable LIHTC support for the renovation and preservation of existing affordable units (in the average year between 2009 and 2021, about 49 percent of newly financed LIHTC units were rehabbed or acquired as-is), the program also provides a substantial source of financing for new housing construction. In 2021, housing finance agencies reported allocating credits for about 90,000 new units that were guaranteed for households with low and moderate incomes (a small number of additional units were included in mixed-income projects). This represented the continuation of an upward trend in allocations for new construction since the Great Recession.

How much of the US housing supply is produced through LIHTC financing?

Tax credit allocations give us a clue about how many new affordable housing units are financed by the federal government, but not the full story. That’s because projects take several years to go from receiving credit allocations to opening for residents and because even though a project receives a credit, it doesn’t mean it’ll be used. Some investors must return credits to agencies without starting construction because of difficulties assembling financing (though this doesn’t happen frequently outside of economic crises.)

Perhaps surprisingly, there’s no reliable federal database of federally supported new housing construction. As such, we evaluated data from the National Housing Preservation Database to assess how many new units open each year with tax credit financing.

We estimate that in 2019 (the most recent year with full data availability), between 50,000 and 60,000 new housing units were completed with LIHTC financing. This is on par with the number of annual allocations from 2016 to 2017, when most of these 2019 projects were likely financed. Based on the growth in allocations in recent years, there could be a substantial boost in new LIHTC-financed projects in the coming few years.

The number of new construction units with LIHTC financing hit a high point in the mid-2000s.

Our estimates show that since the early 1990s, LIHTC has financed between 3 and 5 percent of all new housing units completed in the United States. This small share reflects the dominance of single-family homes in the US housing market.

Even so, LIHTC has played an important role in supporting new multifamily housing construction. Between 2000 and 2019, we estimate that about 25 percent of new apartments built nationwide were supported in part through LIHTC. The highest levels were recorded between 2003 and 2005, and between 2010 and 2012. In the first period, LIHTC completions were higher than the typical trend; in the second, national unsubsidized multifamily completions were lower than usual. LIHTC’s share of completions has trended down since the early 2010s as overall multifamily construction has increased and LIHTC completions have declined.

Today, a large share of the multifamily housing built across the United States is supported at least in part through tax credit financing. Levels vary; in some largely rural states, almost half of new apartments are supported through LIHTC. The concentration of such subsidized units varies within states as well. Other programs often used in tandem with LIHTC also help, including the National Housing Trust Fund, the HOME Investment Partnerships Program, tax-exempt multifamily bonds, and state and local affordable housing programs, such as housing trust funds and inclusionary zoning programs.

Expanding LIHTC could help meet today’s acute affordable housing needs

Federal support enables the annual construction of tens of thousands of new units that otherwise would not be built or offered at affordable costs to renters. LIHTC program innovations and expansions could help increase the affordable rental supply during today’s national housing affordability crisis.

Policymakers could consider the following steps:

• To increase supply in areas with lagging multifamily construction, Congress could increase overall state LIHTC allocations while expanding LIHTC’s capacity to finance new units by providing additional credits to states with high housing costs and inadequate recent housing production.
• To reduce red tape and program costs, Congress could allow state and local entities to develop new housing directly with LIHTC, rather than having to work through private investment, by authorizing the use of direct pay, which was included in the 2022 Inflation Reduction Act for clean energy projects.
• The federal government could also restore the Tax Credit Exchange Program, which allowed housing agencies to exchange unused or returned credits for grants between 2007 and 2009. Either approach could allow governmental bodies to avoid the complicated process of syndicating credits, which adds costs to projects and reduces the overall value of the credits.
• Because rental housing can come in all property sizes, states could consider expanding the use of LIHTC to groups of properties with four or fewer units, including single-family detached homes, in communities with historically low multifamily supply and practical barriers to development, such as inadequate public infrastructure.

LIHTC is a popular program that for almost four decades has reduced housing costs for millions of families. In the face of growing housing needs and limited housing availability, expanding LIHTC could provide affordable housing for many more families in need.