Tax Incentives for Economic Development: What is the Low-Income Housing Tax Credit?
The Low-Income Housing Tax Credit (LIHTC) is the primary federal program to encourage the production of affordable rental housing for low-income households. Financed by the federal government but administered by state housing authorities, it subsidizes the acquisition, construction, and/or rehabilitation of rental property by private developers. The credit, enacted in the Tax Reform Act of 1986 and made permanent in 1993, will cost an estimated $5.7 billion dollars in 2009. The LIHTC is often criticized as inefficient and complex. Evidence is mixed about whether the credit actually induces the production of much additional housing for low-income families.
- Developers may claim credits over 10 years equal to the present value of up to 70 percent of the qualified costs of a development project. The credit rate is reduced to 30 percent for projects receiving other federal subsidies or acquiring existing housing. Qualified costs equal the eligible costs multiplied by the fraction of the rental units reserved for low-income families.
- Eligible projects must have at least (1) 20 percent of residential units occupied by tenants with household income below 50 percent of the area median income; or (2) 40 percent of residential units occupied by tenants with household income below 60 percent of the area median income. Rent for these units cannot exceed 30 percent of family income.
- Project owners must comply with the set-aside requirements and rent restrictions for 30 years. Past tax credits are recaptured with interest if the project violates the terms during the first 15 years.
- In 2009, the federal government provided each state with an aggregate credit of $2.30 per resident but not less than $2.665 million. These amounts reflect temporarily higher amounts provided by the Housing Assistance Tax Act of 2008 of $0.20 per resident and 10 percent of the minimum allocation. In 2010, both values will revert to their permanent inflation-indexed values.
- State housing authorities must develop an allocation plan fulfilling general federal requirements. States typically allocate credits to projects through a competitive application process. Projects receive points for satisfying criteria outlined in the state’s allocation plan. States must award at least 10 percent of their annual credit allocation to projects sponsored by non-profit organizations.
- Critics of the LIHTC argue that the program is both complex and inefficient. A survey of projects developed in Missouri found that most developments needed at least one additional layer of subsidy to finance the project. One study estimated that a $1,000 tax credit produces only $590 worth of housing, although evidence suggests the program is becoming more efficient over time.
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Joint Committee on Taxation, "Estimates of Federal Tax Expenditures for Fiscal Years 2008-2012" (JCS-2-08, October 31, 2008).
Burman, Leonard E., "Low-Income Housing Credit" (Washington: Urban Institute, October 1, 1999).
CCH Incorporated, "CCH Tax Briefing: Housing Assistance Tax Act of 2008" (Chicago, July 2008).
Joint Committee on Taxation, "Present Law for Certain Housing Tax Benefits" (JCX-28-07, May 23, 2007).
McClure, Kirk, "The Low-Income Housing Tax Credit as an Aid to Housing Finance: How Well Has It Worked?" (Housing Policy Debate Vol. 11 No. 1, pp. 91-114, 2000).
Authors: Paul Duncan, Carol Rosenberg, and Kim Rueben
Last Updated: March 19, 2009