A Win-Win-Win for Affordable Housing

The affordable housing tax credit benefits the economy in many ways.

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In this June 29, 2012 photo, the Cottage Landings affordable housing project is shown while under construction in Rye, N.Y. The development is part of a 750-unit requirement in the settlement of a 2009 lawsuit against Westchester County. The county is being criticized by the federal government over its implementation of the settlement.

Created as part of the last major tax reform effort in 1986, the Low-Income Housing Tax Credit (LIHTC) replaced previous policies with a successful private-public partnership that ensures the development of housing for low- and moderate-income Americans. Since its inception, the program has financed the construction of more than 2.5 million affordable homes. With many tax policies currently under review in Congress, it is important that the LIHTC be preserved in any future tax reform effort.

Under the LIHTC program, also known as the affordable housing credit, the Department of the Treasury issues tax credit allocation authority to state housing finance agencies. The state agencies develop criteria by which the tax credits are allocated to developers in order to construct housing that must remain affordable for at least 30 years.

The tax credits, which are awarded via a competitive application process, are syndicated from the developers to investors, who in return provide equity for construction financing. These investments ensure that the money is available to build the properties, thereby reducing debt loads and development costs. Without such financing, it is difficult to connect future affordable housing needs with the upfront costs of construction. Finally, the syndicated credits are claimed over a 10-year period to ensure program compliance with oversight from state agencies and the IRS.

When the buildings are placed into service, the program provides rental homes for families at or below 60 percent of area median income, who pay rent of no more than 30 percent of their income.  And government data makes clear the need for such housing, particularly in the wake of the Great Recession and rising rents. According to the 2010 American Community Survey, 19.4 million renting households (49 percent of all renting households), were rent burdened or paid more than 30 percent of their total income in rent. The same data indicate that a quarter of all renting households paid more than half of their income in rent.

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In addition to adding to the nation's affordable housing stock, the affordable housing credit is also a job creator. Economists at the National Association of Home Builders estimate that the construction activities financed by the tax credit support approximately 95,000 jobs and generate $7.1 billion in economic income per year.

The construction or supply-side focus is key to the program's success. By ensuring financing is available to construct safe, high quality housing, the LIHTC supports the development of housing that might not otherwise be financed for certain populations or neighborhoods.

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The program also has broad support. The Joint Center for Housing Studies at Harvard University wrote in a 2011 review of America's rental housing, "the Low-Income Housing Tax Credit program has sound financial underpinnings and a track record of success in delivering rental housing assistance."

The Housing Commission of the Bipartisan Policy Center also expressed support for the LIHTC program in its February 2013 report ("Housing America's Future: New Directions for National Policy"). The commission recommended policymakers, "protect and expand the Low Income Housing Tax Credit as the bedrock of the nation's efforts to preserve and increase the supply of affordable rental housing." In the report, the commission noted that over the program's 24 years history, LIHTC properties have experienced a foreclosure rate of only 0.62 percent, significantly lower than other forms of real estate. This low rate is due to the robust allocation and oversight process that is required under present law.

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Certain refinements can ensure the success of the program continues, including making permanent the 9 percent minimum credit rate policy that was enacted in 2008 and now serves to deal with today's historically low interest rates. Absent this fix, the amount of equity available for affordable housing projects would decline due to the formula that assigns the credit amounts. This important effort has been led by Reps. Pat Tiberi, R-Ohio, and Richard Neal, D-Mass., as well as Sen. Maria Cantwell, D-Wash.

When it comes to tax and housing policy, analysts usually focus on their attention on the mortgage interest deduction, which helps facilitate the purchase of home. However, it is important to keep in mind the positive impact that the affordable housing credit, as another housing tax incentive, has in ensuring the supply of affordable rental housing. It would be a critical mistake if a successful policy created in the last tax reform effort was harmed by the next.

Robert D. Dietz is an economist with the National Association of Home Builders. Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's Eye on Housing blog and @dietz_econ on Twitter.

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