In Louisville, Kentucky, the newly renovated Beecher Terrace low-income Apartments stand as a testament to the ongoing need for affordable housing in America. As the cost of rental prices continues to rise, low- and moderate-income households face the challenge of finding affordable homes. In an effort to address this issue, the House of Representatives has passed the Tax Relief for American Families and Workers Act of 2024, which aims to expand the largest federal subsidy program for the construction of affordable housing, known as the Low-Income Housing Tax Credit (LIHTC).
The LIHTC program, with an annual cost of approximately $13.5 billion, has long enjoyed broad political support due to its structure as a tax break rather than direct spending. However, upon closer examination, it becomes clear that the program's design may not be the most efficient solution to deliver housing assistance to low-income families.
One of the key drawbacks of the LIHTC program is its convoluted and complex nature. The program is administered at the federal level by the Internal Revenue Service (IRS), but it is the state housing finance agencies that run the programs and award the credits to developers based on state-specific criteria that vary significantly. This complexity is further compounded by the fact that roughly half of the tax credit projects also utilize other federal, state, or local subsidies, each with its own set of rules and regulations.
The process of disbursing LIHTC involves multiple intermediaries, such as investors and syndicators, who often take a cut at each stage. The Government Accountability Office estimates that fees paid to these intermediaries average between 2 and 5 percent of the total investment. As a result, money is diverted from the primary goal of building low-income housing.
While LIHTC does have some benefits, such as leveling the playing field for non-profit developers, it is concerning that nearly 90 percent of LIHTC projects are developed by for-profit entities. Additionally, the lack of comprehensive cost data for these projects makes it impossible to measure the program's effectiveness accurately. The GAO has long raised this concern, yet Congress has failed to address it.
Moreover, the LIHTC program has demonstrated several shortcomings. Studies have shown that tax credit units are often more costly compared to comparable projects that do not rely on LIHTC. This cost disparity raises questions about the program's efficiency. Furthermore, there is evidence that LIHTC may disproportionately concentrate poverty rather than promote mixed-income housing, which was its original intent. Additionally, the program misses opportunities to increase the housing supply by focusing primarily on new construction or substantial renovations, rather than assisting renters with older existing housing.
Given the current discussion around expanding the LIHTC program, it is crucial for Congress to take this opportunity to enhance disclosure and oversight measures. Additionally, policymakers should consider whether developer tax credits are truly the most effective means of ensuring affordable housing for low- and moderate-income households. Exploring alternative approaches, such as subsidizing the purchase and rehabilitation of single-family homes in cities with vacant lots, could potentially yield better results.
As the need for affordable housing continues to grow, it is imperative that policymakers critically assess existing programs to ensure that taxpayer funds are used effectively and efficiently. The LIHTC program, despite its political popularity, deserves a comprehensive reevaluation to better serve the needs of those who rely on affordable housing assistance. By taking a more strategic and innovative approach, we can work towards providing stable and affordable homes for all Americans.
