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Corporate Welfare / Tax Credits

A Problem LIHTC Won’t Fix

By Elias Tsapelas on Mar 10, 2022
Apartments
Ryan DeBerardinis / Shutterstock

A one-size-fits-all approach to public policy is rarely the best option. This is especially true when the topic is something as complicated as affordable housing. Recently, I wrote about the lack of sufficiently affordable housing in the St. Louis region and how it can be a difficult issue to solve. One thing I didn’t discuss is the lack of evidence suggesting that the low-income housing tax credit (LIHTC) could meaningfully improve the region’s housing affordability.

St. Louis has a very specific housing affordability problem. There are plenty of places to live, but there aren’t enough places with rents low enough to be affordable to those making less than 30% of the area’s median income (AMI). Affordable, per the report’s definition, also means only spending 30% of your income on housing. For St. Louis, a family of three making 30% of the area’s median income earns approximately $23,000 per year ($76,000 (the St. Louis AMI) X 30%). So, an affordable place to live for that family would be approximately $560 per month. ($23,000 X 30% (to find what yearly rent is considered affordable for them) / 12 (to convert to monthly rent).)

Despite being Missouri’s primary tool for addressing housing affordability, the LIHTC program is ill-suited to address the described housing affordability issue in St. Louis. The first and most obvious reason is that LIHTC is an already expensive way to subsidize the development of new housing

Another supposed benefit of LIHTC developments is that they come with rent controls. Remember, LIHTC developments, in exchange for ten generous years of tax subsidies, agree to set aside a portion of units for those with low incomes. The most common arrangement for LIHTC developments is for 40% of the units to be reserved for those earning below 60% of the AMI. But the rents for the LIHTC units are not based on the income of the potential residents; rents are set based on the income in the surrounding area (the AMI). Because of this, even LIHTC-subsidized housing would likely not be affordable enough for the family mentioned above.

To use some numbers to illustrate this example: As explained above, rent needs to be no more than 30% of your income to be considered affordable, and LIHTC units considered “affordable” can be reserved for those making 60% of the AMI. So rent for that “affordable” unit in a LIHTC development will be 18% of the AMI (30% x 60% of AMI). Based on the $73,000 AMI in St. Louis, this means that the monthly rent for a family of 3 in that LIHTC unit is about $1,100 per month ($73,000 x 18% / 12). But as was described above, a family of three in St. Louis making 30% of the AMI needs rent to be about $560 per month to be considered affordable—and the cost of the LIHTC unit is nearly double that figure. Because of this, LIHTC tends to offer little to no help to the poorest residents.

Housing policy is incredibly complicated, but it’s time to stop thinking of LIHTC as the answer to every problem. St. Louis may have an affordability problem, but LIHTC is clearly not the best solution.

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About the author

Elias Tsapelas

Director of State Budget and Fiscal Policy

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