Blogs| The Economic Impact of LIHTC: A High-level Overview of Its Contributions to Local Economies
Written by
Priya Gupta
Published
Aug 22, 2024
Topics
LIHTC
Before the Low-income Housing Tax Credit (LIHTC) program, the federal government directly funded the construction of affordable housing in the country. This caused a fiscal load the government couldn’t shake.
As a result, the housing policy in the country was hobbled by fiscal proprietary—unable to muster the resources needed to create more affordable housing units and unwilling to seek elsewhere for the funds.
Then in 1986, Congress created the LIHTC program to incentivize private developers and investors to take part in the construction of affordable housing units.
This article does not seek to determine the relative success or failure of LIHTC as a policy initiative. Instead, it tries to summarize the historical economic effect that LIHTC has had on local communities as a measure of the program’s impact.
Traditionally, housing costs have been one of the largest drags on household incomes. Harvard’s Joint Center for Housing Studies estimates that a third of households are said to be cost-burdened, i.e., these families spend more than 30% of their income on rent.
When families spend such a large percentage of their income on housing, they tend to spend less on other, equally important aspects which can hinder the growth of communities over the long term.
The LIHTC program targets families who spend more than 30% of their income on housing. It has spurred the creation of affordable rental units, increasing the total supply of affordable homes—a critical need for low-income families.
With incentives to private developers to invest in affordable housing LIHTC has successfully created an ecosystem to raise capital through tax credits, manage ongoing projects, and sell these tax credits to investors.
This ecosystem has reduced the need for pure debt-based financing, making it economically viable to offer rent-controlled housing to a part of the population.
The impact of LIHTC extends beyond housing units constructed. Each new project brings a surge in job opportunities. Architects, construction workers, joiners, electricians, machinery operators, the demand for skilled labor spikes with new construction projects. And LIHTC enables communities to host more projects and foster local employment.
The construction phase of LIHTC projects also boosts industries tied to building, such as suppliers of materials, landscaping companies, and local retail businesses that serve the workforce.
With the LIHTC program, the Federal government effectively shifts the economic burden of financing affordable housing projects away from upfront cash from the budget to tax credits which corporations can claim annually over the coming decades.
In effect, the Federal government incentivizes the deployment of private capital and cuts out the need for purely debt financing, making the economy stable.
The LIHTC program also benefits the local community indirectly by spurring economic activity and by increasing the property values of decrepit neighborhoods.
Affordable housing brings people, and people drive local economies. Residents of LIHTC properties spend money at nearby businesses, from grocery stores to local cafes.
LIHTC developments in a community revitalize that neighborhood. That’s according to the Bipartisan Policy Center, a not-for-profit think tank, and the National League of Cities (NLC), an advocacy group.
Affordable housing can mean new business, according to the NLC, and gives a fillip to the local service industries.
According to research by the Stanford Graduate School of Business, new LIHTC developments in low-income neighborhoods lead to appreciation of property rates by 6.5%.
The same study further goes to state that LIHTC developments lower crime rates and improve diversity in the community.
A better property market means additional revenue for the local government in the form of a wider taxes base. These additional funds can become a fresh revenue source to reinvest in the community, creating a virtuous cycle of economic growth.
The biggest impact that LIHTC programs have on the community is that LIHTC projects can reinvigorate economic activity and improve the quality of life for existing residents.
It’s been briefly covered above but the following section digs into this aspect of LIHTC in much more detail.
Living in affordable, quality housing can significantly improve residents’ well-being. According to the Center on Budget and Policy Priorities (CBPP), it can reduce the financial stress that families feel and allow them to spend more on other important factors, besides housing, like healthcare and education.
The CBPP further states that safe, stable housing also provides a foundation for better physical and mental health, contributing to a higher overall quality of life.
Studies show a causality between the development of LIHTC projects and the reduction in violent crime in the neighborhood. Affordable housing can also foster community cohesion by creating stable neighborhoods.
Residents who are not constantly worried about eviction or finding the next place to live get the time and motivation to invest into their communities.
This stability can lead to stronger neighborhood ties and better school performance among children, making the entire community safer and more connected.
Despite its successes, the LIHTC program has not escaped criticism.
As mentioned earlier in this blog post, the biggest shortcoming that critics point to is that the supply of affordable housing LIHTC creates does not keep up with the demand.
Also, the application process for developers is complex and competitive, which can discourage smaller, potentially impactful projects from receiving funding.
Gentrification is also a long-term concern associated with LIHTC projects. While LIHTC aims to provide affordable housing, it can sometimes contribute to gentrification. As neighborhoods improve, property values rise, and original residents might be priced out.
Critics say that the LIHTC program needs more regulations and reform to overcome implicit challenges, including excessive construction costs and fragmented oversight.
The economic impact LIHTC has on communities is clear. And the program must carefully progress to ensure that affordable housing remains accessible to those who need it most.
LIHTC is not perfect. However, by addressing the valid challenges critics have underlined in the program, LIHTC can help create more vibrant and self-sustaining neighborhoods.
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