Low-Income Housing Tax Credit

Low-Income Housing Tax Credit
Name	Low-Income Housing Tax Credit
Established	1986
Country	United States
Program type	Tax incentive
Administered by	Internal Revenue Service; state housing agencies
Related legislation	Tax Reform Act of 1986; Housing and Economic Recovery Act of 2008; Consolidated Appropriations Act

Contents

Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit was created to encourage private investment in affordable rental housing by providing federal tax credits to investors who fund qualified low-income housing projects. It operates through collaboration among the Internal Revenue Service, state housing finance agencies such as the California Tax Credit Allocation Committee, and private actors including community development corporations, financial institutions, and syndicators like Enterprise Community Partners and Boston Capital. The program interacts with legislation and policy initiatives including the Tax Reform Act of 1986, the Housing and Economic Recovery Act of 2008, and the American Recovery and Reinvestment Act of 2009.

Background and Purpose

The credit was enacted in the Tax Reform Act of 1986 to replace prior incentives and to address shortages identified in reports from entities such as the Urban Institute, the Joint Committee on Taxation, and the Government Accountability Office. Policymakers including members of Congress like Senator Bill Bradley and Representative Henry Hyde framed the instrument alongside housing policy debates involving the Department of Housing and Urban Development and advocacy groups such as the National Low Income Housing Coalition, Habitat for Humanity, and the National Council of State Housing Agencies. Early empirical work by scholars at the Brookings Institution and the Urban Institute influenced allocation formulas and set expectations for impacts on rental markets in metropolitan areas including New York City, Los Angeles, Chicago, and Houston.

The program issues two types of credits commonly referred to as the 9% credit and the 4% credit, rooted in statutory provisions administered by the Internal Revenue Service and allocated by state agencies like the New York State Homes and Community Renewal and the Texas Department of Housing and Community Affairs. Allocation involves Qualified Allocation Plans that states design consistent with guidance from the Department of the Treasury and precedent from cases considered by courts such as the United States Court of Appeals for the D.C. Circuit. Investors, including large banks like JPMorgan Chase, Bank of America, and Wells Fargo, often purchase credits via syndication arranged by firms such as Low Income Investment Fund and Citigroup Affordable Housing. Allocation priorities frequently reference targets associated with metropolitan planning organizations like the Metropolitan Transportation Authority and regional entities such as the Southeastern Pennsylvania Transportation Authority when considering transit-oriented developments near sites like Union Station (Washington, D.C.) or neighborhoods served by Los Angeles County Metropolitan Transportation Authority.

To qualify, projects must meet rent and income tests based on IRS rules and monitoring by state agencies and compliance units like the Neighborhood Reinvestment Corporation (NeighborWorks America). Units typically must be rented to households earning a specified percentage of area median income as defined by the Department of Housing and Urban Development and verified through forms such as IRS Form 8609 and annual reports audited by firms including KPMG, PricewaterhouseCoopers, and Deloitte. Noncompliance can trigger actions by courts including proceedings in the United States Tax Court and enforcement by agencies like the Office of Inspector General (HUD). Owners frequently work with property managers affiliated with companies such as AvalonBay Communities, Equity Residential, and Bozzuto to maintain certification and satisfy recordkeeping required by statutes like the Internal Revenue Code.

Developers rely on layered financing combining tax-exempt bonds, municipal subsidies from entities like the New York City Economic Development Corporation, HOME and Community Development Block Grant funds administered under program rules by the Department of Housing and Urban Development, and equity from investors including Goldman Sachs and Morgan Stanley. Nonprofit developers such as Mercy Housing, BRIDGE Housing, and Local Initiatives Support Corporation often partner with national firms and philanthropic intermediaries like the Ford Foundation and MacArthur Foundation. Construction and rehabilitation involve contractors and architects known regionally, while syndicators and compliance monitors such as Novogradac & Company and Boston Capital coordinate closings, investor reporting, and ongoing asset management. State housing agencies set Qualified Allocation Plans influenced by litigation precedents from courts like the Supreme Court of the United States and policy reports from think tanks including the Urban Institute and the Brookings Institution.

Research by scholars at institutions including Harvard University, Princeton University, University of California, Berkeley, and the Massachusetts Institute of Technology has examined impacts on housing supply in markets like San Francisco Bay Area, Seattle, Miami, and Atlanta. Analyses from the Government Accountability Office, the Urban Institute, and the Joint Center for Housing Studies of Harvard University indicate the program has produced millions of affordable units and influenced neighborhood revitalization in areas such as South Bronx, Bronzeville (Chicago), and Mission District (San Francisco). Studies often compare LIHTC outcomes to outcomes from programs administered by the Department of Veterans Affairs and Department of Agriculture (USDA) Rural Development in rural contexts like Appalachia and Mississippi Delta counties.

Critiques have come from economists at institutions such as University of Chicago, Yale University, and Columbia University who question cost-effectiveness relative to alternatives like vouchers administered through the Department of Housing and Urban Development and programs run by agencies including HUD and USDA Rural Development. Concerns raised by advocacy organizations including the National Low Income Housing Coalition, Public Citizen, and the Center on Budget and Policy Priorities focus on geographic distribution, preservation versus new construction, and benefits accruing to investors such as BlackRock and Nuveen rather than tenants. Legal challenges and policy debates have involved state legislatures such as the California State Legislature and federal oversight by committees including the House Financial Services Committee and the Senate Banking Committee over allocation priorities, program integrity, and reforms proposed in bills drafted by members like Senator Elizabeth Warren and Representative Maxine Waters.