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RS22389 – An Introduction to the Low-Income Housing Tax Credit – 10/4/2016

RS22389 – An Introduction to the Low-Income Housing Tax Credit – 10/4/2016 published on

Author: Mark Patrick Keightley, Specialist in Economics; Jeffrey M. Stupak, Research Assistant
Pages: 8

The low-income housing tax credit (LIHTC) program is one of the federal government’s primary policy tools for encouraging the development and rehabilitation of affordable rental housing. These non-refundable federal housing tax credits are awarded to developers of qualified rental projects via a competitive application process administered by state housing finance authorities. Developers typically sell their tax credits to outside investors in exchange for equity. Selling the tax credits reduces the debt developers would otherwise have to incur and the equity they would otherwise have to contribute. With lower financing costs, tax credit properties can potentially offer lower, more affordable rents. The LIHTC is estimated to cost the government an average of approximately $7 billion annually. The LIHTC program was originally designed to provide a 30% subsidy for rehabilitated rental housing via the so-called 4% credit, and a 70% subsidy for newly constructed rental housing via the so-called 9% credit. To ensure that the 30% or 70% subsidies were achieved, the U.S. Department of the Treasury designed a formula for determining the effective 4% and 9% LIHTC rates. The formula depends in part on current market interest rates that fluctuate over time. These fluctuations have caused the LIHTC rates to change over time, and typically have resulted in effective LIHTCs below the 4% and 9% thresholds. Developers and investors have expressed concern over the uncertainty that the variable LIHTC rate changes introduce into the program.

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