The federal government subsidizes housing through numerous tax and spending programs. One of the more inefficient programs is the Low Income Housing Tax Credit (LIHTC). The program provides $9 billion a year in tax credits to support housing construction. The federal government distributes the credits to the states, which in turn award them to developers to cover part of the costs of constructing apartment buildings and other projects. In return, developers must cap rents for the units they set aside for low-income tenants.
The benefits of the LIHTC are supposed to flow through to tenants in the form of lower rents, but studies suggest that investors, developers, and financial companies gain most of the benefits. The program has complex administration, is prone to abuse, and produces costly low-income housing.
The Trump administration and Republicans in Congress are considering major tax reforms aimed at reducing tax rates and ending unjustified tax breaks. They should consider repealing the LIHTC. It complicates the tax code and is a poorly targeted solution to housing affordability problems.
Instead of federal subsidies, a better way to reduce housing costs would be through state and local policy reforms. The states should reduce the burden of building and zoning regulations to increase the supply of housing, including multifamily housing for low-income tenants.
How the LIHTC Works
Congress enacted the Low-Income Housing Tax Credit as part of the Tax Reform Act of 1986. That law aimed at simplifying the tax code and eliminating special breaks, but creating the LIHTC did the opposite.1
Under the program, the federal government allots $9 billion a year in tax credits to state housing agencies based on state populations.2 Then the agencies distribute credits to selected housing developers based on a complex and bureaucratic process. Developers who receive credits nearly always sell them to large banks and other investors, often using syndication firms as intermediaries. This provides cash to developers for construction and gives investors equity in the projects, as well as credits to use on their tax returns over a 10-year period. Read More HERE