Repeal the Low-Income Housing Tax Credit

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Revenues * 0.1 0.5 1.3 2.3 3.4 4.6 5.8 7.1 8.4 4.2 33.5

Source: Staff of the Joint Committee on Taxation.

This option would take effect in January 2017.

* = between zero and $50 million.

Real estate developers who provide rental housing to people with low income 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 and the substantial rehabilitation of existing units.

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 people whose income is below 50 percent of the area’s median income or 40 percent of the units for people 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 people to 30 percent of a set portion of the area’s median income. (That portion is either 50 percent or 60 percent and corresponds to the developer’s choice regarding the first requirement.) In addition, the buildings have to meet local health, safety, and building codes.

LIHTCs can be used to lower federal tax liability over a period of 10 years. There are two types of credits. One type is reserved for projects that receive financing through tax-exempt bonds; it can equal up to 30 percent of the costs allocable to the set-aside units. The other type of credit generally equals up to 70 percent of costs allocable to the set-aside units. Projects can qualify for larger credits (equal to up to 39 percent of the costs allocable to the set-aside units for the first type of credit or up to 91 percent of such costs for the second type of credit) if they are located in census tracts determined by the Department of Housing and Urban Development to have a large proportion of low-income households.

This option would repeal the low-income housing tax credit starting in 2017, although taxpayers could continue to claim credits granted before 2017 until their eligibility expired. Repealing the LIHTC would increase revenues by $34 billion from 2017 through 2026, according to estimates by the staff of the Joint Committee on Taxation.

One argument for repealing the low-income housing tax credit is that there are alternative ways to help people with low income 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 help families pay rent for housing they choose, provided it meets minimum standards for habitation and total rent does not exceed limits set by the federal government. 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, people 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 them.

Repeal of the LIHTC could be paired with an increase in housing vouchers. That would, of course, result in less deficit reduction than repeal alone. The net effect on the deficit would depend on the extent to which the voucher program was expanded. One possible approach would be 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 existing programs. Therefore, another possible approach would be 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 assistance; in that case, deficits would be unaffected, on balance.

A rationale against implementing the option is that landlords might be less willing to accept housing vouchers in areas experiencing growing strength in their housing markets. LIHTCs could be more effective at preserving low-income housing in such areas because LIHTC units are provided on the basis of 30-year contracts. In addition, by supporting the construction of new buildings and the substantial rehabilitation of existing buildings, the LIHTC can help improve neighborhoods. For example, one study found that, in New York City between 1991 and 2000, the use of LIHTCs in blighted neighborhoods to replace abandoned buildings with new construction and to build new structures on empty lots increased property values within a few blocks of the newly constructed buildings. Although the positive effect diminished somewhat over time, it remained significant five years after the completion of the projects. 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.