Challenges and Criticisms of the LIHTC Program

LIHTC Program

Since the United States Congress created the Low-Income Tax Credit (LIHTC) program, it has become the primary policy tool for the federal government to develop affordable housing.  

Using LIHTC, developers have created more than 3 million affordable housing units. And with 25% of Americans spending half their income on rent, affordable housing is more critical than ever. 

The Department of Housing and Urban Development calls LIHTC the “most important resource for creating affordable housing in the country.” 

However, the history of the LIHTC program isn’t as rosy as you might think. This article explores the program’s main challenges and criticisms. 

LIHTC is Immensely Complex 

The LIHTC program is incredibly complex. It comprises a labyrinth of federal regulations that stakeholders must wade through to access tax credits.   

Plus, local and state-specific mandates are built on top of federal regulations.   

Navigating this complex terrain of regulation requires specialists and consultants, adding to the entire program’s cost.   

The application process is also time-consuming. There is no central stakeholder at the federal level to coordinate and allocate LIHTC. Instead, allocation is a decentralized and scattered process that is location-specific, with each state managing its LIHTC funds through a local housing finance agency (HFA). 

In addition, maintaining compliance throughout the program period requires specialized expertise. Building owners and independent investors use asset managers to monitor and track LIHTC compliance. They also need to pay for regular audits. 

Monitoring compliance is essential to ensure that LIHTC investments perform well during the entire compliance period. 

 

LIHTC is Inefficient 

Since it’s a complex product, higher costs are associated with constructing LIHTC housing. It’s not a direct subsidy. It’s a tax credit program adding more stakeholders to the lifecycle of a LIHTC application.  

Higher Cost per Unit 

Some estimates put the cost increase at 20% more expensive by square foot than the industry average.  

Another study found that LIHTC affordable housing is more expensive to build than comparative housing units in Arizona and Washington.  

Funding Private Properties 

One of the main criticisms of the LIHTC program for creating affordable housing is that it is time-capped.   

This means that after the compliance period ends, the developer or building owner can choose to opt out of the affordability requirements, renting out the units at market rate or redeveloping the property into luxury condos.  

Federal subsidies under LIHTC can cover up to 70% of the construction costs for each building. So, this option to opt-out generates a feeling of public funds being used to subsidize private developments.    

LIHTC is Prone to Non-compliance 

Even though industry advocates say compliance in the LIHTC industry is inadvertent, some critics, like Cato and Shelterforce, claim that the industry lacks sufficient oversight. These views are also echoed by the GAO. 

There’s no central authority to ensure compliance since the federal government delegates administration and compliance tracking to each state HFA. These, in turn, rely heavily on developers or investors self-reporting LIHTC compliance.  

Even though the state HFA requires independent third-party audits, critics claim it lacks the resources to ensure that every LIHTC building maintains compliance.   

Plus, there is also a lack of a publicly accessible database about non-compliant properties.  

LIHTC Underserves the Disabled 

The problem with LIHTC developments is that they are not federally reserved for people with disabilities. According to the HUD, 5% of housing projects funded by federal subsidies must be accessible.   

However, this does not always translate to housing for disabled people. Matching people who need accessible housing to available inventory takes time, and building operators cannot always wait, so these units also tend to get rented out to eligible households. 

 

LIHTC Segregates Neighborhoods 

Critics say that the LIHTC program may lead to concentrated poverty and racial disparity.  

According to the Center on Budget and Policy Priorities, poorer neighborhoods have twice the number of LIHTC units as more affluent neighborhoods. The study by CBPP also observes the same pattern in racial segregation.  

Inadvertently, LIHTC programs promote the concentration of poverty.    

However, this recent study also claims that newly constructed LIHTC projects do not lead to the concentration of poverty or promote racial segregation. 

 

LIHTC is Rigid  

Since LIHTC development is essentially a rental program, it does nothing to promote home ownership and income mobility among low-income households.    

With its affordability requirements for, LIHTC housing also misses out on covering middle income households struggling with poverty in some form.    

In many places, there might be better solutions than multi-family homes to the problem of affordable housing.  

But, pragmatically speaking, the LIHTC program lacks the flexibility to adapt to different housing needs.   

LIHTC is complex, so smaller players find it challenging to break into the market. The amount of regulation means they need to hire specialists. Plus, there’s very little room to do new things or try new ways to complete and operate a project. 

LIHTC’s Increasing Share in Affordable Housing  

Over the last 40 years, LIHTC has been the most significant funding source for affordable housing construction.   

The ecosystem is now heavily dependent on it. LIHTC asset management teams, syndicators, tax consultants, etc., are all stakeholders in affordable housing, and they are built around the LIHTC program. The program demands that developers and operators hire specialists, which adds to the cost of business.   

LIHTC’s success promotes an overdependence on the project, which is not a silver bullet for any housing problem. Affordable housing needs a more nuanced approach.   

Allocation and Distribution of Tax Credit for the LIHTC Program

LIHTC Program

The Low-Income Housing Tax Credit (LIHTC) program provides federal tax credits as incentives to private investors to help increase the supply of low-income rental housing.   

Investors earn tax credits in exchange for the equity they invest in funding these affordable housing projects. The tax credit they earn is a percentage of the eligible cost (i.e., the construction cost minus administrative and land acquisition cost) and the affordable housing units constructed.   

This article gives an overview of how HFAs allocate these tax credits and the steps leading up to this. 

The Background 

Before we speak about how LIHTC is allocated and distributed to applicants, we must understand some elements that are part of the LIHTC application cycle.    

Allocation Administration Agencies 

Even though financing for LIHTC programs is disbursed by the federal government, individual states administer and allocate these funds according to their specific needs.   

Often, the LIHTC allocated to individual developers and applicants each year combines federal and state funds. The individual states develop their requirements to use their federal fund allocation for the year. That is, different states will prioritize different kinds of housing and demographics of low-income households to target using affordable housing projects.   

The federal government allocates funds from the central kitty to individual states based on the state’s population. Each state administers the LIHTC program through its low-income housing administration agency or the housing finance agency (HFA). For example, some LIHTC allocating agencies for California, Nebraska, and New York. 

The Lifecycle of a LIHTC Application 

Applicants submit their LIHTC application to the local state’s HFA. Once an online LIHTC application is approved by the state’s low-income housing administration agency or Housing Finance Agency (HFA), the applicants can move to start monetizing these tax credits.   

These tax credits generate equity to fund the low-income housing development project.   

Once the development is completed, investors can claim these tax credits over the next ten years. Investors hire asset managers who use the compliance tracking features of LIHTC software to ensure compliance with affordability requirements for the whole compliance period. 

Federal Funds Cap 

The federal government imposes a yearly cap on the funds disbursed to each state.   

This cap is the state’s population times a multiplier. For 2024, the IRS has set this multiplier at $2.90 or $3,360,000, whichever is greater.  

State Tax Credits 

Each state has different application fees, application timelines for inviting applications, and unique application cycles for LIHTC. Plus, the deadline for accepting applications also varies. Therefore, applicants must know and follow their own state’s application process.  

Every state housing agency also has different tax credit funds available for a specific year. Each state may also augment the federal funds for tax credits it received with a certain percentage of its budget to develop low-income housing.   

States also enforce different credit periods or the period over which the tax credits will be ‘paid out’ to the investor.   

In addition, the type of credits that each state entertains is also different. Some states cap the tax credit allocations by rural and metro areas. States also differ in the type of tax credits they disburse to developers, such as Certificated or Allocated. 

A Note on Allocated vs. Certificated Tax Credits 

While discussing tax credits generated from LIHTC investments, we need to briefly speak about the two types of tax credits: allocated and certificated tax credits.  

Investors earn Allocated Tax Credits because of investments in low-income housing projects, which are claimed by the investors yearly.   

Conversely, investors buy Certificated Tax Credits directly from the state or one of the project participants.   

Allocated tax credits require a compliance period of 15 years (usually). They are subject to tax claw-backs or recapture by the IRS if the developed property does not meet affordability regulations. They are treated as long-term investments.  

Certificated tax credits are usually free from these compliance requirements and are meant as short-term investments. However, the proceeds are taxable if an investor sells these tax credits further. 

Applications for LIHTC 

OK, now we have sufficient background information to understand the allocation of LIHTC. The HFA awards successful applications for LIHTC.  

Once state HFA invites applications for LIHTC, applicants must address the specific points in the QAP that each state has set out.  

Each state has a different threshold eligibility for awarding LIHTC and differs in its scoring framework of the LIHTC applications. Once the application is reviewed and scored, there can be no additional information that an applicant can provide.   

The HFAs can notify applicants and seek clarification on their submitted information, but applicants must provide new details. Once the application is reviewed and the notification for clarification is addressed, the HFA scores each application and awards conditional letters of intent for awards of tax credits. 

Conditional Reservation of Tax Credits 

When the HFA approves the application for LIHTC, it issues a letter of reservation for tax credits. This reservation is conditional upon the applicant submitting the hard copy of all the documents submitted during the LIHTC application.   

The developer or the applicant can use this conditional reservation to ask investors for equity to fund the development.   

The HFA expects low-income housing development to be completed in the year the tax credit is awarded or in the next two years. This extension is permissible subject to approval by the HFA. 

Carryover Allocation  

The conditional reservation of tax credits does not mean the LIHTC has been allocated to the investor.   

LIHTC only begins to be credited after the building is completed and put in service. If the applicant or developer cannot complete the development of the LIHTC project by the end of the year, the applicant can request a carryover allocation.   

A Carryover Allocation extends the time allowed to complete the LIHTC development by two more years. The Carryover Allocation Agreement is a detailed form requiring an updated application, complete plans and specifications, and a statement of material change with filled-in carryover data sheets.   

The applicant must also spend 10% of the expected basis within one year of issuing the Carryover Allocation. This 10% is called the 10% Test Certificate and must be submitted to the HFA in the year following the Carryover Allocation. 

The 10% Test Certificate 

The 10% test certificate submits that the developer has spent 10% of the development’s expected costs. These costs can include the acquisition of the land.   

The 10% Test Certificate must be verified by an independent CPA or attorney and submitted by the applicant to the HFA within 12 months of an executed carryover allocation. In addition, the applicant will also need to prove that the development is up to code on the environment and energy regulations of the area. 

Cost Certification  

The final stage of allocating tax credits is the cost certification and issuing of the IRS Form 8609. New.  

The cost certification is, in essence, the certificate of completion that the developer issues.   

Each HFA provides clear guidelines for what the cost certificate must contain. The developer issues the cost certification to the HFA once the building is finished.   

The developer documents the actual project costs. Each HFA provides specific guidelines for cost certifications.    

Once the cost certificate is issued, the developer exits the development project and hands over the daily operation to the property owner or investor, who, often using LIHTC software, begins to claim the tax credits yearly. 

The IRS Form 8609 

The IRS Form 8609 is the tool by which investors can start claiming tax credits yearly on buildings that have been completed and are ready to be rented out.   

After reviewing and accepting the cost certifications, the HFA approves the amount of tax credits initially stated in the LIHTC application.   

The final tax credit amount usually remains unchanged. Once the HFA approves the cost certifications, the IRS issues Form 8609 to the investor or the building owner.   

The investor now takes over the day-to-day running of the LIHTC project from the developer. The investor now begins to claim the federal tax credits using the issued 8609 forms to the tune of the amount the LIHTC application stated. Investors can claim these tax credits for the next ten years provided they ensure compliance in the affordable housing projects for the entire compliance period – usually 15 years.  

LIHTC Compliance for Claiming Tax Credits 

LIHTC applicants are allocated tax credits to monetize when their LIHTC applications are approved. However, these projects only earn tax credits once the developments are complete.  

Tax credits must be applied for and claimed at the beginning of each year. They are not automatically credited to the investor. Therefore, this adds to the investor’s compliance burden since they must maintain compliance documentation and proactively monitor the tax credit application and allocation of tax credits yearly. 

LIHTC and Development Financing for Affordable Housing

LIHTC

Arranging financing for any property development is challenging. For constructing affordable housing, however, this challenge is even more acute.   

The gap between rents that low-income households can afford, and the mortgage repayments property owners must bear is unsustainable.  

To fill this gap, many developers rely on a combination of some form of government subsidies. Combining the Low-Income Housing Tax Credit (LIHTC) program and the HOME Investment Partnerships program is popular among developers.   

This article will give a high-level overview of financing with LIHTC, the LIHTC financing ecosystem, LIHTC financing stakeholders, other federal government subsidies, and what happens after the construction phase is complete and the developer sells the property. 

Financing LIHTC Projects 

LIHTC is a central part of government subsidies that fund affordable housing development and is responsible for the construction of more than 3.5 million units for low-income households. 

Financing LIHTC projects is a complex process that involves a blend of equity and debt. The LIHTC program engages private and public sectors to develop or maintain affordable housing.   

Developers raise capital for each of their housing projects using traditional financing like bank loans, REITS, or individual investors.   

However, developers can reserve some part of their multifamily housing project as affordable housing to be eligible for government subsidies in proportion to the affordable housing units they plan to produce. Equity investors and tax credit syndicators play a role in how this system works.  

Equity and Debt in LIHTC Financing 

Effective LIHTC developers leverage the strategic use of equity and debt to fund affordable housing development.   

The Federal Department of Housing and Urban Development (HUD) sets nationwide affordability requirements, and the Internal Revenue Service (IRS) calculates each state’s tax credit allocation.    

For each state, its Housing Finance Association (HFA) supplements Federal LIHTC guidelines with state-specific requirements and designs the application processes for government funds.   

Private developers, in turn, propose affordable housing projects to these HFAs, seeking LIHTC funding, among other government subsidies. Once a project is approved, the developer monetizes the tax credits to raise additional funds to meet the funding gaps in the development project. 

The Role of Equity Investors 

Developers secure immediate financing primarily through equity they raise from institutional investors in exchange for tax credits.   

These investors provide upfront cash in exchange for the future tax credits the project will generate, allowing the developer to cover the construction costs. The partnership between developers and equity investors usually operates on a contract partnership as an LLC, transforming future tax credits into financial capital to build affordable housing. 

Tax Credit Syndicators 

Developers also engage with tax credit syndicators to monetize tax credits. Syndicators pool multiple LIHTC projects into a single equity fund, which investors can then invest in as a diversified portfolio.  

Developers with limited taxable income or those seeking to mitigate financial risks prefer syndicators over individual investors.  

Syndicators also benefit developers by providing access to a broader pool of potential investors. And investors are also able to spread their risk across several projects. 

Additional Subsidies for Financing Affordable Housing 

Besides the LIHTC program, developers often tap into other federal and state programs to close the financing gap for affordable housing projects. The CDBG, HTF, HOME program, and Multifamily Revenue Bonds are some other programs that developers can leverage.   

State-specific funding programs will supplement these subsidy programs and are unique to each state. 

Community Development Block Grant (CDBG) 

The U.S. Department of Housing and Urban Development (HUD) administers the Community Development Block Grant (CDBG) program.   

The CDBG provides affordable housing, anti-poverty programs, and infrastructure development through annual grants to cities, counties, and states.  

These grants help improve the living conditions of low- and moderate-income residents by ensuring access to decent housing and expanding economic opportunities.  

The National Housing Trust Fund (HTF) 

The Housing and Economic Recovery Act (2008) established the National Housing Trust Fund (HTF). It targets constructing, rehabilitating, preserving, and operating rental housing for extremely low-income individuals.   

With allocations increasing annually, the HTF is a relatively new resource in the affordable housing finance landscape.   

It addresses the needs of the most vulnerable populations. Advocacy efforts continue to expand this funding source. In 2023, the HTF had an allocation of $382 million and has been consistently growing in relevance as an integral part of the national housing strategy. 

HOME Funds 

The HOME Investment Partnerships Program is a resource for low-income housing developers.  

Despite funding fluctuations, HOME funds allow states and localities to address a broad spectrum of affordable housing challenges. The program supports both rental and homeownership developments for low-income households.  

Multifamily Revenue Bonds 

Multifamily Revenue Bonds finance the acquisition, construction, or rehabilitation of affordable rental housing.   

As with LIHTC financing, to raise capital via MRB bonds, developers must reserve a portion of the apartments for families with incomes at or below specific average median income (AMI) thresholds. States frequently combine these bonds with LIHTC and HOME funds to serve lower-income families more effectively for extended periods.  

Eligibility for LIHTC 

The LIHTC program’s affordability requirements are designed to address the critical need for accessible and sustainable housing.  

Compliance standards set in place to cap tenant incomes and rent restrictions help ensure long-term affordability for low-income households. 

Target Demographic for LIHTC Housing 

LIHTC housing targets individuals and families with incomes below certain thresholds, typically 30% to 60% of the Area Median Income (AMI).   

This ensures that the program serves those with the greatest need for affordable housing, including low-income households that struggle to find housing options within their financial reach. 

Income Limits and Rent Restrictions 

To qualify for LIHTC, property owners must rent out housing units according to specific income limits and rent restrictions.   

Income limits vary by location and household size, with eligibility generally based on household income as a percentage of AMI.   

Rent for LIHTC units is capped to ensure that no more than 30% of a household’s income is spent on housing costs, including utilities. Rent caps for an area work out to 18% of the AMI.  

This approach guarantees that LIHTC housing remains affordable and accessible over time. 

Threshold Criteria in LIHTC 

The LIHTC program mandates developers to set aside a minimum number of housing units for affordable housing. Developers must also cap rents on these units.  

Most developers reserve 20% of a property’s units for households earning 50% or below the AMI or at least 40% of units for households earning 60% or below the AMI.  

Reserving affordable housing units and deciding on rent caps is called Minimum Set-Aside Election.   

The state agency allocating the tax credit conducts threshold criteria review to validate this Minimum Set-Aside Election. Developers must clear this review to receive tax credits.   

Recent amendments via the income averaging rule for LIHTC properties now allow households to earn up to 80% of AMI if the average income across all LIHTC-assisted units does not exceed 60% of AMI. This flexibility accommodates a broader range of income levels while ensuring the program still focuses on those in need. 

An Overview of LIHTC Project Compliance 

Once a LIHTC project is complete, it must comply with the developer’s affordability commitments when applying for tax credits. Property managers and operators must ensure units are affordable to and occupied by eligible low-income tenants.  

Ensuring compliance with affordability commitments in LIHTC projects is critical to monetizing tax credits.   

Once the property construction and lease-up phases are finished, the developer hands over the property to the operator, also called the property owner. In many cases, institutional investors or tax credit syndicators delegate responsibility for the day-to-day management and regulatory compliance of the LIHTC project to asset managers.  

With the help of LIHTC property management software, asset managers track and ensure project compliance if the low-income affordability restrictions are in force.  

Minimum Set-Aside Election 

The minimum set-aside election is made at the project’s inception. This election is irrevocable and specifies the percentage of units and their corresponding income limits the developer commits for low-income tenants. Property owners must stick to these minimum elected standards. 

The Compliance Period 

Developers must adhere to the affordability and occupancy requirements throughout the Compliance Period. The compliance period extends for 15 years initially, after which some states present exit options for investors. There is a subsequent 15-year extended use compliance period, so the compliance period spans 30 years for LIHTC. 

Annual Certification 

Property owners are required to submit an Annual Owner’s Certification of Continuing Program Compliance (AOC). This certificate verifies adherence to LIHTC compliance standards and, where applicable, other subsidy program regulations. 

The AOC includes the submission of tenant data and the payment of an Annual Compliance Monitoring Fee. Failure to verify and submit these certification reports can result in significant penalties, including issuing a Notice of Noncompliance. 

Tax Credit Clawbacks 

LIHTC property owners’ noncompliance can trigger a clawback of awarded tax credits. Once triggered, the IRS recaptures the financial benefits previously awarded to the project. Since tax credits are claimed yearly, the IRS increases the tax liability of the corporation or investment fund that owns and operates the affordable housing project.    

Compliance Monitoring is Critical to LIHTC Financing 

States and local agencies monitor LIHTC projects to ensure ongoing compliance with program requirements. This involves regular reviews of tenant eligibility, rent levels, and property standards. 

LIHTC projects are complex. Property owners use specialized tools to track and monitor the compliance of their LIHTC projects. It’s up to asset managers to identify and resolve any noncompliance proactively to ensure profitability for the investors. 

History of the Low-Income Housing Tax Credit Program

lihtc program

Until the middle of the last century, the federal government used to invest in affordable public housing. But by the 60s, federal investment in public housing declined.  

The Low-Income Housing Tax Credit (LIHTC) program was initially envisioned to bridge this gap in affordable housing by incentivizing the private sector to develop and maintain affordable public housing.  

Since then, the program has evolved into the mainstay of the affordable housing development market in the country. In recent years, critics have called for it to be revamped to meet modern challenges and changing market dynamics. 

In this article, we explore what LIHTC is and its purpose, how it was created, and its recent history. 

What is LIHTC? 

LIHTC is a federal program for encouraging the development and preservation of affordable housing. Initiated by the Tax Reform Act of 1986 under President Ronald Reagan, LIHTC has been instrumental in financing millions of affordable housing units nationwide.  

Bipartisan support helps its effectiveness in leveraging private investment toward creating affordable rental options for low-income Americans. 

How Is It Different? 

LIHTC is also referred to as Section 42 housing. It diverges from previous housing initiatives by focusing on attracting large corporate investments rather than individual wealthy investors. This shift followed a desire to introduce discipline and efficiency previously unseen in affordable housing programs.  

By design, LIHTC operates under the administration of state agencies and is regulated by the Internal Revenue Service (IRS). This flexible oversight mechanism allows states to tailor the program to their housing needs. This decentralized approach also ensures that developers and investors adhere to the same standards to qualify for the tax credits. 

The Purpose of LIHTC 

The LIHTC program aims to incentivize private sector involvement in developing affordable housing. It offers tax credits for acquiring, rehabilitating, or constructing rental properties, with a section reserved for lower-income households.   

In the past, this mechanism has facilitated the creation of housing for working families, veterans, seniors, and individuals with disabilities. It has also played a crucial role in rebuilding communities affected by natural disasters. 

How Does LIHTC Work? 

LIHTC encourages private investment in affordable housing and requires projects to meet specific affordability and quality criteria. It involves the allocation of tax credits to developers, project application and approval, investor participation, and utilizing different types of credits based on project specifics.  

By enforcing systematic compliance requirements, the program ensures that the resulting housing developments serve the needs of low-income households and provide a return on investment for those who finance them. 

Allocation of Tax Credits 

State housing finance agencies (HFAs) allocate LIHTC to developers. The allocation is based on a per capita or minimum small population state allocation formula. This ensures that even states with smaller populations receive a significant allocation for LIHTC.    

Project Application and Approval 

Developers submit project applications to state HFAs, detailing how they meet the state’s Qualified Allocation Plan (QAP) criteria. The QAP sets forth the eligibility requirements for projects, including the number of affordable units, project cost thresholds, and housing quality. Projects that best meet these criteria are awarded tax credits. 

Role of Investors and Tax Credit Syndicators 

Once HFAs approve a project and allocate tax credits, developers often sell these credits to investors to generate funding for the project. Tax credit syndicators enter the ecosystem at this stage, aggregating and packaging tax credits into investment vehicles.   

Investors provide capital in exchange for tax credits, which can offset their tax liabilities dollar-for-dollar over a ten-year period. This financing provides the upfront capital needed for housing development. 

9% vs. 4% Credits 

The LIHTC program offers two types of credits: 9% and 4%. Both credits are subject to the same affordability requirements but are designed for different projects.  

The 9% credit, which a state’s HFA competitively allocates, is primarily used for new construction projects without additional federal subsidies. It covers a more significant portion of the project’s costs, providing a subsidy of approximately 70%.   

The 4% credit is non-competitive and is typically used for projects involving tax-exempt bonds or other government subsidies. This tax credit subsidizes about 30% of the eligible costs.  

Affordability and Compliance 

To qualify for LIHTC, housing development projects must adhere to strict affordability requirements. Housing projects must set aside a certain percentage of units for tenants with incomes at or below specified levels relative to the Area Median Income (AMI).   

Projects approved and awarded LIHTC tax credits must comply with the affordability commitment for at least 15 years. Compliance is monitored by state HFAs, with the IRS having the authority to reclaim tax credits if projects fail to meet these standards. 

Legislative History of the LIHTC Program 

LIHTC’s journey spans several decades. This journey reflects the shifts in policy from federally financed public housing to the public-private partnership model. It also spans changes in the economic philosophy of the times, notably the switch to the Regan-era trickle-down economics.  

Before the LIHTC program, the federal government financed most public housing. LIHTC marked a shift from government-financed to government-subsidized low-income housing.  

The Tax Reform Act of 1969 

The Tax Reform Act introduced specific tax breaks for affordable housing to address affordable housing issues. However, it was also marked by challenges, including susceptibility to fraud, highlighting the complexities of incentivizing private investment in affordable housing. 

The Section 8 Program in the 1970s 

As a response to the declining quality of public housing and the need for more direct subsidies, the Section 8 program was introduced in the seventies. It represented a significant federal effort to subsidize the rent of low-income Americans, emphasizing direct federal assistance for housing. 

The Reagan Administration and Decline of New Constructions 

The 1980s brought a significant change in federal housing policy under President Reagan. Emphasizing trickle-down economics, the administration cut federal spending on affordable housing programs, including Section 8 construction subsidies.   

This period saw a decline in new construction of affordable housing, as tax rule changes aimed at encouraging private investment in rental properties had the opposite result. 

Tax Reform Act of 1986 

The Tax Reform Act of 1986 was a watershed moment marking the birth of the modern LIHTC legislation. In response to the challenges of the early 1980s, the Tax Reform Act of 1986 created the LIHTC program.   

It was designed to encourage private investment in affordable housing through tax incentives, marking a pivotal shift in the approach to housing policy. The program was first met with skepticism but became a cornerstone of affordable housing finance in the country. 

Congressional Renewal and Permanency 

After its initial success, LIHTC faced the need for renewal in 1989. Initially, the program was renewed annually by Congress. By the beginning of the nineties, it had many supporters from the affordable housing community and corporate investors.   

The Omnibus Budget Reconciliation Act of 1993 eventually made LIHTC permanent. As other affordable housing funding declined, LIHTC became increasingly central to the delivery of affordable housing. 

Evolution of the LIHTC Program 

Since its inception in 1986, the LIHTC program has become the primary mechanism for financing affordable rental housing in the United States.   

However, challenges exist. The program’s complexities and performance during significant financial crises (when affordable housing is often needed most) feed the ongoing debates surrounding its effectiveness and efficiency. 

Immediate Criticism 

LIHTC faced scrutiny over its complexity and the indirect route through which it channels support for affordable housing. Since it relied heavily on tax incentives for corporations, critics argued that it introduced inefficiencies and depended too much on the fluctuating profitability of corporate investors.  

The 2008 Sub-Prime Lending Crisis 

The Great Financial Crisis profoundly impacted LIHTC. The financial conditions suppressed demand for tax credits as corporate profits plummeted.  

This downturn halted many new developments and rehabilitation projects, prompting Congress to intervene with the American Recovery and Reinvestment Act of 2009. This Act introduced financing programs to revive stalled LIHTC projects.  

Lowering of Corporate Tax Rate in 2017 

The demand for LIHTC fell even further in the run-up to the 2016 Presidential Elections. The subsequent reduction of the corporate tax rate depressed the need for LIHTC from Corporations who felt that offsetting their tax liability was unnecessary.  

As lower tax liabilities reduced corporations’ incentive to invest in tax credits, there was lower demand, and thus, fresh investments in affordable housing programs decreased.   

The program’s sensitivity to tax policy shifts was challenging, and developers had to adapt to a new financial landscape.    

The 2018 Consolidated Appropriations Act 

In response to the fresh challenges facing LIHTC, the 2018 Act increased the amount of tax credits available by 12.5 percent through 2021. It also introduced new affordability guidelines.   

By this legislative adjustment, Congress aimed to counteract the dampened investment climate and support financing more affordable housing units.  

The Tax Relief for American Families and Workers Act of 2024 

The Act of 2024 extended the 12.5% allocation increase, which expired in 2021. It also reduced the tax-exempt bond financing requirement for LIHTC projects. These provisions are meant to make the LIHTC program more accessible and practical. 

Successful Despite Challenges 

LIHTC has adapted to the changing landscape of affordable housing. It has successfully weathered economic downturns, policy shifts, and the evolving needs of low-income Americans.   

Despite its criticisms and challenges, it has produced millions of affordable housing units. Plus, it has demonstrated the potential of public-private partnerships in addressing complex social issues. The program’s bipartisan support, resilience, and adaptability illustrate its critical role in the affordable housing ecosystem.