LIHTC 101: Program Basics
Since the program’s inception, the low-income housing tax credit (LIHTC) has been the federal government’s primary tool for increasing the supply of affordable housing across the nation. The program has become so prominent that 15 states, including Missouri, have implemented their own versions. Today, Missouri’s LIHTC program is the state’s most expensive tax credit. And despite the enormous cost to Missouri taxpayers, very few resources exist that explain how the state’s program actually works or what it is trying to accomplish.
In 1986, the federal government enacted the LIHTC program with the second round of President Reagan’s tax cuts. The idea was simple: provide a supply-side incentive to make housing more affordable. LIHTC represented a new approach to government-funded housing policy. Instead of directly subsidizing the rents of low-income individuals, the program forgoes future federal tax revenues to incentivize developers to build more housing. And in exchange for the tax credits, the developers must agree to reserve a portion of the subsidized units for low-income tenants and to cap rents for low-income tenants for thirty years.
Each year, the Internal Revenue Service allocates federal LIHTCs across all 50 states based on population. It is then the responsibility of each state’s housing agency to distribute those credits for approved projects. Last year, Missouri was allocated $2.75 per full-time resident from the federal government, which translated to $17 million in tax credits available for new projects. But not every project is eligible for the same amount of tax relief. Within the federal program, there are actually two types of tax credits: one for new construction projects and another for rehabilitations. The credits for new construction are the most popular, and can cover up to 90% of all construction costs over 10 years. The rehabilitation tax credits are less lucrative and cover closer to 40% of construction costs over the same period.
Awarding tax credits for the cost of construction lowers the investment required by the project developers, but not in the way you’d expect. Developers rarely use the credits to build housing directly; instead, developers typically sell the tax credits to independent investors at a discount to finance the originally approved project. The project’s investors then use the credits as dollar-for-dollar reductions in their business or individual income tax liability over the following 10 years.
And the way Missouri has implemented its state LIHTC program has made things worse. In response to claims from developers that the federal program alone cannot make projects profitable, Missouri’s LIHTC program fully matches each federal credit dollar for dollar with a state credit.
Over a series of upcoming blog posts, I’ll discuss how the LIHTC program as described fundamentally fails to effectively or efficiently improve Missouri’s affordable housing landscape.