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.
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Real estate developers who provide rental housing to people with low income may qualify for low-income housing tax credits (LIHTCs), which are designed to encourage investment in affordable housing. The credits cover a portion of the costs of constructing new housing units or substantially rehabilitating existing units; however, the credits cannot be claimed until the properties are completed and occupied. The taxpayers who claim the credits are usually investors in those properties, who provide developers with funding for the construction or rehabilitation in exchange for the credits. LIHTCs can be used to lower federal tax liability over a period of 10 years.
For a property to qualify for the credits, developers must agree to meet two requirements for at least 30 years. First, they must set aside a certain percentage of rental units for people whose income is below a certain threshold—either 20 percent of a project's units for people with income below 50 percent of the area's median income or 40 percent of the units for people with income below 60 percent of the median. (Developers can also set aside 40 percent of the units for a group of people whose average income is not above 60 percent of the area's median income, as long as no one person in that group has an income above 80 percent of the area's median income.) Second, developers 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—either 50 percent or 60 percent, depending on the developer's choice regarding the first requirement.
There are two types of credits. One is reserved for projects that receive financing through tax-exempt bonds; it generally equals 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. For qualifying projects in census tracts determined by the Department of Housing and Urban Development to have a large proportion of low-income households, the two types of credits cover more of those costs—up to 39 percent and up to 91 percent, respectively.
Each year, the federal government allocates funding for the 70 percent credit to each state on the basis of its number of residents. (Allocations of funding for the 30 percent credit are governed by per-state limits on the issue of tax-exempt bonds.) In 2003, that funding was set at $1.75 per resident or a minimum value of $2 million per state; those amounts were adjusted for inflation in each subsequent year through 2017. In 2018, that funding formula would have provided $2.40 per resident or a minimum of nearly $3 million per state; however, under the 2018 Consolidated Appropriations Act, states will receive an additional 12.5 percent in funding in each year from 2018 through 2021. Thus, the staff of the Joint Committee on Taxation (JCT) estimates that the tax expenditure for the LIHTC would increase over time.
This option would repeal the LIHTC starting in 2019, although real estate investors could continue to claim credits granted before 2019 until their eligibility expired.
Effects on the Budget
Repealing the LIHTC would increase revenues by $49 billion from 2019 through 2028, according to JCT's estimates. Over that period, revenues would increase as the number of outstanding 10-year credits granted before 2019 declined.
The estimate for this option is uncertain because three factors make it difficult to anticipate exactly when or whether LIHTCs will be used. First, states generally fail to allocate a small number of credits each year, and those credits are put to use in other states in the following year. Second, developers lose allocated credits if their projects are not completed and occupied by the end of the second calendar year after the credits are allocated. Third, once developers complete a project and it is occupied, investors may delay their use of credits by one year.
One argument for repealing the LIHTC 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—commonly 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. The federal government sets limits on the amount of assistance provided by the vouchers. Such vouchers are typically less expensive for the government to provide than LIHTCs, primarily because in most housing markets where low-income households are situated, the costs of constructing a new building or substantially renovating an existing building are higher than the costs of simply using an existing building. (Other forms of federal housing assistance—project-based rental assistance and public housing—tend to be less expensive than the LIHTC for the same reason.) Further, people with very low income often cannot afford even the reduced rents in the set-aside units of LIHTC projects without additional subsidies.
An argument against implementing the option is that landlords might be less willing to accept vouchers in areas experiencing growing strength in their housing markets. LIHTCs could be more effective at preserving low-income housing in such areas because they 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, LIHTCs can help improve neighborhoods. For example, some research suggests that the use of LIHTCs in blighted neighborhoods can increase property values near newly constructed buildings (Ellen and others 2007). However, because those benefits may be limited to the immediate neighborhoods, such projects might be more appropriately funded by local or state governments rather than the federal government.