Evidence Builds Against the Low‐Income Housing Tax Credit
The Low‐Income Housing Tax Credit (LIHTC) is a federal housing subsidy that allocates tax benefits to the states for constructing apartment buildings and other projects. The states hand out the benefits to developers, who are required to cap rents for the units they set aside for low‐income tenants.
Chris Edwards and I reviewed the program in 2017 here. We found that the program is very complex and greatly inflates the cost of housing projects. Since then, new research has bolstered our findings.
Economists Edgar Olsen and Bree Lang are soon to publish The Hidden Subsidies of Low‐Income Housing Tax Credit Projects. The paper finds:
“the taxpayer cost of providing housing in tax credit projects is three times the most widely cited figure, the taxpayer cost per unit exceeds the median value of owner‐occupied houses in California, and the total taxpayer cost is at least a third greater than the cost of assisting the same households with standard housing vouchers.”
Housing vouchers are paid directly by government housing authorities to landlords on behalf of low‐income beneficiaries. By contrast, LIHTC dollars change hands between a wide range of housing industry intermediaries before the funds materialize in a rent‐capped housing unit. So it is not surprising that Olsen and Lang found that costs of the LIHTC are much higher than for the vouchers. In line with this, a GAO study that found LIHTC units cost 19 to 44 percent more than units subsidized using housing vouchers.
LIHTC program noncompliance and errors also add to program costs. A recent inspector general audit found that
“approximately 67,000 e‑filed LIHTC claims [for Tax Years 2015 through 2019] lacked support for claimed LIHTC amounts of almost $15.6 billion.”
Other recent research has found more drawbacks to the LIHTC. One Center for Budget and Policy Priorities study finds that, compared to rental units, almost twice as many LIHTC units are located in high‐poverty tracts. Another study finds that the program contributes to greater concentrations of poverty and racial minorities. This is probably at least partly due to the fact that “neighborhoods with a relatively higher share of new LIHTC units [are] shunned by higher‐income households,” according to another study.
The finding that LIHTC results in greater economic and racial segregation is particularly interesting in light of the Biden administration’s resurrection of Affirmatively Furthering Fair Housing (AFFH), a HUD rule which aims to reduce racial concentrations of poverty in cities nationwide. As explained elsewhere, government policy—zoning regulations in particular—contribute considerably to the pockets of poverty that AFFH is keen to address. But now research suggests that not only regulations but also government housing subsidies contribute to geospatial concentrations of poverty and racial and ethnic minorities.
Despite these recent research findings, the Biden administration proposed a large increase in the LIHTC program in its new budget of $28 billion over 10 years. And the administration is moving forward with a proposal to bring back AFFH. Given the new research findings, both proposals are mistakes. Government policy should consider the consequences of current policy and repair those before expanding its influence.
The LIHTC is supposed to increase the supply of affordable housing, but the program is very costly and creates collateral damage. Furthermore, studies find that many of the benefits flow to the banks and developers not the tenants.
A better way for policymakers to increase low‐cost housing is to reduce government‐imposed barriers to construction. Policymakers should reassess zoning rules, land‐use regulations, and permitting requirements that may act as a barrier to housing construction and raise costs. It does not make sense for the federal government to subsidize housing affordability while local governments neutralize their efforts with artificial barriers to housing supply.