November 13, 2013
OPTIONS FOR REDUCING THE DEFICIT: 2014 TO 2023

RevenuesOption 28

Repeal the Low-Income Housing Tax Credit

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Revenues 0.2 0.7 1.4 2.4 3.5 4.5 5.5 6.6 7.6 8.9 8.2 41.3

Source: Staff of the Joint Committee on Taxation.

Note: This option would take effect in January 2014.

Real estate developers who provide rental housing for low-income households may qualify for the low-income housing tax credit (LIHTC), which is designed to encourage investment in affordable housing. The credit covers a portion of the costs incurred for the construction of new housing units, the substantial rehabilitation of existing units, and the purchase of land on which new housing units will be built.

Each year, the federal government allocates funding to the states for LIHTCs on the basis of a per-resident formula. State or local housing authorities review proposals submitted by developers and select those projects that will receive credits. To qualify for the credit, developers must agree to meet two requirements for at least 30 years: First, they must set aside either 20 percent of a project’s rental units for households whose income is below 50 percent of the area’s median income or 40 percent of the units for households whose income is below 60 percent of the median. Second, they must agree to limit the rent they charge on the units occupied by low-income households to 30 percent of the area’s median income. (The calculations used to determine if those requirements are satisfied include adjustments for household size.) In addition, the buildings have to meet local health, safety, and building codes.

LIHTCs generally can be taken for projects for 10 years and can be worth up to 70 percent of the construction or rehabilitation costs allocable to the set-aside units, or up to 30 percent of those units’ share of a building’s purchase price. (The Housing and Economic Recovery Act of 2008 set a temporary floor on the annual credit equal to 9 percent of the capital costs of constructing a building placed in service before December 31, 2013; that floor has led to the issuance of some credits that exceed 70 percent of construction costs over 10 years.) Projects located in census tracts determined by the Department of Housing and Urban Development to have a large proportion of low-income households can qualify for credits worth up to 130 percent of costs.

This option would repeal the low-income housing tax credit starting in 2014, although projects granted credits before 2014 could continue to claim them until their eligibility expired. Repealing the LIHTC would increase revenues by $41 billion from 2014 through 2023, according to estimates by the staff of the Joint Committee on Taxation.

One argument for repealing the low-income housing tax credit is that other approaches are available to help low-income households obtain safe, affordable housing, generally at less cost to the government. For instance, the Housing Choice Voucher program—sometimes referred to as Section 8 after the part of the legislation that authorized it—provides vouchers that allow eligible families to pay some or all of the rent for housing they choose, provided the dwelling meets minimum standards for habitation. Such vouchers are typically a less expensive way to provide housing assistance than the LIHTC primarily because the costs of constructing a new building or substantially renovating an existing building are higher than the costs of simply using an existing building in most housing markets where low-income households are situated. Further, because households with very low income often cannot afford even the reduced rents in the set-aside units of LIHTC projects without additional subsidies, vouchers are especially helpful to those households.

For that reason, policymakers might be interested in increasing housing vouchers if they reduced the value of or repealed the LIHTC. An increase in housing vouchers along with repeal of the LIHTC would, of course, result in less deficit reduction than repeal alone. The net effect on the deficit would depend on the extent of the expansion of the voucher program. One possible scenario is to expand the voucher program to cover the same number of households currently served by the LIHTC; in that case, deficits would still be reduced, on balance. But the number of low-income households qualifying for housing assistance substantially exceeds the number supported through vouchers and the LIHTC. Therefore, another possible scenario is to use all of the savings from repeal of the LIHTC to expand the voucher program, which would increase the total number of households receiving housing support; in that case, deficits would be unaffected, on balance.

A rationale against implementing the option is that, unlike tenant-based vouchers, project-based LIHTCs support the construction of new buildings and the substantial rehabilitation of existing buildings, which can help turn around blighted neighborhoods. Vouchers would typically have a smaller impact on any one location than LIHTCs because recipients do not generally cluster very closely together. For example, one study found that, in New York City between 1987 and 2000, the use of LIHTCs to replace abandoned buildings and construct buildings on empty lots in blighted neighborhoods increased property values within a few blocks of the subsidized projects; those increased property values did not extend to neighborhoods that were farther away, however. Because those benefits seem to be limited to the immediate neighborhoods, such projects might be more appropriately funded by local or state governments rather than the federal government.