99-514 ) to provide an incentive for the acquisition and development or rehabilitation of affordable rental housing. Proponents of the LIHTC view the credit as highly efficient and effective. As evidence of effectiveness, advocates state that the LIHTC is responsible for producing 50% of all multifamily housing starts annually, and virtually all affordable rental housing in the United States since the credit was introduced. Additionally, the credit is perceived as more costly and less efficient than demand-side subsidies like the Section 8 Housing Voucher Program. As policymakers begin to address affordable housing issues, modifications to the LIHTC will likely be considered. This report discusses some fundamental public-policy questions that have not received much attention. Is the lack of affordable housing a result of a housing-market failure? And is the LIHTC efficient, or can it be improved? Despite the significance of the tax credit in housing finance markets, these questions are not definitively answered in economics literature. To the extent that tax credits are awarded to projects not at the margin (i.e., inframarginal projects that could proceed without tax credit financing), it could be argued that the LIHTC does not add to the housing stock. Aside from the impact of the LIHTC on the stock of housing, the determination of whether the LIHTC addresses the affordable housing problem also requires an assessment of the "affordability" of the tax credit units. A criticism of the LIHTC program has been that the program, by its design, does not serve very-low-income households—those most in need of affordable housing. Projects may include more than one building. Is the Value to Investors too High? Advocates of the LIHTC program, however, argue that the program is cost effective and that deep subsidies for projects are required because of the demands of the affordable housing market, not the LIHTC program. The effectiveness of the LIHTC relies on the ability of state housing authorities to select marginal projects (those projects that, if not for the LIHTC, would not be developed). Therefore, it would be useful to know whether states are indeed selecting marginal products. Examining the applicants who fail to win credit awards may provide important insights. Do these failed applicants subsequently build housing without the tax credit? Congress may not alter the LIHTC program. As a tax expenditure, the program does not require an appropriation or reauthorization. Alternatively, Congress might modify the LIHTC program. More recently, some attention has focused on the issue of examining the rules of the LIHTC program to determine where its compatibility with other housing-finance programs can be increased. Policymakers have also discussed whether the LIHTC program could be modified to target affordable housing production for households with very-low income. Another option is to repeal the LIHTC program.
The Low-Income Housing Tax Credit (LIHTC) is an economic incentive to produce affordable rental housing. These federal housing tax credits are awarded to developers of qualified projects, who either use or sell the credits to investors to raise capital (or equity) for real estate projects. The tax benefit reduces the debt and/or equity financing that the developer would otherwise have to obtain. With lower financing costs, beneficiaries of tax credits can offer lower, more affordable rents. See CRS Report RS22389, An Introduction to the Design of the Low-Income Housing Tax Credit, by [author name scrubbed] for a detailed description of how the LIHTC program works and an overview of legislative developments.
Proponents of the credit view the LIHTC as highly effective because of the more than one million rental units already financed by the credit. Proponents also emphasize that the credit is responsible for the production of up to 50% of all multifamily housing starts in any given year. Opponents argue that the LIHTC is not effective or, at a minimum, far less effective than supporters claim because LIHTC units have supplanted other affordable rental housing and because the supply-side credit program is more costly than demand-side subsidies like the Section 8 Housing Voucher Program. Opponents also argue that the LIHTC program does not serve very-low-income households, who are often most in need of affordable housing.
As policy makers begin to address affordable housing issues, modifications to the LIHTC could be considered. This report, which will be updated in the event of significant legislative events, discusses some fundamental public policy questions—questions neither extensively explored nor resolved. Is the lack of affordable housing a result of a housing-market failure? Does the LIHTC address the affordable housing problem? And, is the LIHTC efficient, or could it be improved? These questions are not definitively answered in economics literature.
Determining the size of the affordable housing market may be of value. A national inventory system could be created to record information about the net gains (or losses) of affordable rental units. Also, to the extent the effectiveness of the LIHTC relies on the ability of state housing authorities to select marginal projects (those projects that, if not for the LIHTC, would not be developed), it could be useful to know whether states are selecting these projects. Do applicants who fail to win credit awards subsequently go on to build housing without the tax credit?
Congress may not alter the LIHTC program. As a tax expenditure, the program does not require an appropriation or reauthorization. Alternatively, Congress might modify the LIHTC program. Some attention has focused on examining the rules of the LIHTC program to determine where its compatibility with other housing finance programs can be increased. Policymakers have also discussed whether the LIHTC program could be modified to target affordable housing production for households with very low income. Another option is to repeal the LIHTC program.