March 15, 2019
Exploring the Potential of LIHTC Expansion
By Nick Najor
Twenty-first century America finds itself in the midst of a legitimate housing crisis. The Urban Institute reports that for every 100 extremely low-income households, there are less than 30 adequate, available, and affordable housing units. This translates to a national shortage of over 7 million units. The Department of Housing and Urban Development (HUD) estimates that 12 million households now pay more than half of their annual income on housing. The crippling burden of rent has become an increasingly common facet of American life.
One of the most prominent federal policy tools for increasing affordable housing is the Low-Income Housing Tax Credit, or LIHTC. Created in 1986, this tax credit encourages private equity investment in the development of rental housing units for tenants making less than a set percentage of a given area’s median income (AMI). The LIHTC program is administered not by HUD, but instead by the Internal Revenue Service (IRS). Since its inception, it has led to the development of well over 2.5 million affordable housing units and has become the primary facilitator of affordable housing creation in the United States.
LIHTC can help finance both new construction and rehab projects alike. There are two tracks available for complying with the program’s affordability standards: 20% of units set aside for those making less than 50% AMI, or 40% of units set aside for those making less than 60% AMI. Developers use the future value of the tax credit to raise private equity investment in the project, which offsets the lost revenue from the units restricted to below market-rate rent, making the development possible.
The tax credits are allocated annually to each state, who then administer them through their respective housing agencies. State agencies write regulations called Qualified Action Plans (QAP) that outline the selection criteria for LIHTC credit allocation. Applicants must address a wide range of topics to demonstrate a project’s worthiness, such as financial feasibility, location within a community, population needs, past experience as a developer, and the architectural aesthetic or historic nature of the proposed project. Every year, state housing agencies receive far more applications for LIHTC credits than they can award. These are precious and competitive housing development subsidies that garner the attention of both community advocates and large firms alike. Through this process, states are empowered to advance their respective housing agendas by deciding which projects will receive funding.
Here in Michigan, this responsibility falls on the Michigan State Housing Development Authority, or MSHDA. In 2018 alone, MSHDA awarded LIHTC funds to proposed housing developments in communities all over the state, including but not limited to: Detroit, Grand Rapids, Ann Arbor, Flint, Kalamazoo, Pontiac, Jackson, and Ishpeming. While successful, the LIHTC program is far from perfect. Its biggest drawback is that the projects lack permanence. When the credits expire after 15 or 30 years, so too do the affordable rent requirements. In Detroit, looming LIHTC expirations spurred city and community leaders to develop a contingency plan to offset the losses.
Now in its fourth decade, the LIHTC program has sustained political support in Washington from both sides of the aisle. Real estate developers on the right value that the credit encourages and rewards investment, while housing advocates on the left value that it creates more affordable housing. But the 2017 corporate tax cut signed by President Trump dealt a blow to the LIHTC program by weakening the value of its credit on the investor market. When the corporate tax rate was slashed, so too was the financial incentive to invest in LIHTC projects. Congress responded in 2018 by expanding LIHTC funding by 12.5% for the next four years to help offset that effect. It was the first such increase in over a decade. However, this short-term boost will not be enough. Novogradac and Company, a firm that specializes in housing finance, estimated that the corporate tax cuts will still lead to almost 250,000 fewer affordable housing units over the next decade.
In the aftermath of Hurricane Katrina, Congress expanded LIHTC funding in Alabama, Louisiana, and Mississippi as part of a Gulf Coast recovery effort. This precedent suggests that LIHTC expansion could be a tool for relief in particularly troubled housing markets (such as many areas of California), even without the occurrence of a natural disaster. But the response to Hurricane Katrina remains an isolated example of selective LIHTC intervention.
In 2018, three Democratic senators – Kamala Harris (CA), Cory Booker (NJ), and Elizabeth Warren (MA) – all introduced their own housing reform bills, but none of them involved LIHTC. Harris’s legislation focused on rental subsidies. Booker’s bill did as well, but also included substantial details on inclusionary zoning practices. Warren’s plan was the most comprehensive of the three and proposed massive funding increases for the National Affordable Housing Fund. While none of the bills were particularly realistic pursuits in the Republican-controlled Senate, together they illustrate collective momentum toward national affordability legislation.
In a broader context, alleviating the rent burden is just one piece of the puzzle. While renters certainly deserve the attention and focus of legislators, issues in homeownership are equally urgent. The topic of affordable housing also intersects with many other policy issues; stagnant wages and inadequate public transit likely top the list. Such vexing problems require nuanced solutions, but the conversation must begin with acknowledgement of the crisis. We cannot tolerate a status quo where our own housing market prevents families from making ends meet.
As we look forward to an assuredly contentious 2020, housing affordability must play a major role in the campaign discourse. Expansion of the Low-Income Housing Tax Credit can play a valuable role in that conversation. Its track record of sustained productivity in the affordable housing market could serve as low-hanging fruit for lawmakers looking to take the first step towards a more comprehensive agenda. Any effort to improve America’s housing outlook should include consideration for expanding and advancing LIHTC.
Flickr photo by Charles Hildebrandt
Nick Najor is a first-year graduate student at the Gerald R. Ford School of Public Policy. He works part-time at the Detroit Land Bank Authority and is a current fellow of the Michigan Political Leadership Program. You can find him on twitter @NickNajor.