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      Using the Low-Income Housing Tax Credit to Fill the Rental Housing Gap

      Brief Jun-07-2018 | Goldman TR | 2-min read
      1. Insights
      2. Our Research
      3. Using the Low-Income Housing Tax Credit to Fill the Rental Housing Gap
      Download brief
      A residential street in Oak Hill, West Virginia where the Elkins family struggle with ill health and poverty.

      As the country’s largest affordable housing production program, the low-income housing tax credit has helped finance the construction of nearly three million rental units for low-income Americans since 1986.

       

      What's the Issue?

      Stable, long-term, affordable housing is crucial to the well-being of individuals, families, and communities. Housing insecurity—the constant moving from one location to another caused by the lack of a permanent home—is highly stress-inducing and linked to poor health outcomes. (Read the related Health Policy Brief that examines this relationship in detail.) 

      In the United States, a chronic shortage of affordable housing is a barrier to improved health and well-being.The number of high-end units available rose 97 percent from 2005 to 2015, while the number of low-end units renting for less than $800 declined by 2 percent. In 2016, nearly three-quarters of the lowest-income renters spent at least 50 percent of their income on rent, and many lived in units with health and safety hazards and in communities with limited resources. 

      The Low-Income Housing Tax Credit program (LIHTC) has helped create the vast majority of new affordable rental housing in this country. The program allows developers to sell federal tax credits to investors to raise money to build affordable rental units. LIHTC, which costs the U.S. treasury $9 billion a year in lost tax revenue, has made use of an estimated $100 billion in capital since its inception in 1986. By lowering the corporate tax rate, the Tax Cuts and Jobs Act of 2017 decreased the value of the credits, thereby reducing affordable housing production by an estimated 200,000 units over 10 years. However, the recent federal budget deal increased the LIHTC appropriation by 12.5 percent over four years, making up for some of the potential losses.

      What's Next?

      LIHTC will continue to be the linchpin of U.S. affordable housing policy, but federal, state, and local governments must enhance and expand the program and pursue additional new strategies to meet demands for affordable housing. The LIHTC’s impact could be maximized by prioritizing its use in communities with the lowest supply of affordable housing and in well-resourced neighborhoods. Some states have incorporated health and social criteria into the allocation of tax credits in the hope of improving a wide range of outcomes among residents.

      The challenges of ensuring an adequate supply of affordable housing—both through new construction and preservation efforts—are long-standing and complex. In addition to profit maximization, there are regulatory barriers that reduce the supply of affordable housing, such as lengthy permitting processes that drive up construction costs and zoning laws that restrict the number of residents per unit and units per building and ban the construction of smaller residences. Affordable housing developers also face constant resistance from community members who fear that low-income residents will bring a wave of crime into their community, a view that lacks empirical support.

      The LIHTC is a proven strategy to measurably increase the construction and rehabilitation of affordable housing. It also allows policymakers to require specific construction criteria that can lead to better health outcomes—including proximity to low-cost, nourishing food; high-quality schools; and other community resources. Still, as demand for affordable housing continues to grow and production costs skyrocket, policymakers will need to consider enhancements to LIHTC and other regulatory and financing solutions to meet housing needs in communities across the country.

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