The LIHTC provides too little housing for too much money.
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Another persistent problem in the way we talk and act about housing price and cost issues is the continued dominance of the Low Income Tax Credit (LIHTC) as the leading way to create new, subsidized, affordable housing. I’ve long been a critic of the program, and the passage of the “big beautiful bill” with its expansion of the credit has only assured the its life into the future. The evidence is irrefutable: LIHTC housing is expensive and takes a long time to build compared to similar market rate housing. Yet the momentum behind the credit seems unstoppable. Reforming and eventually transitioning away from LIHTC must be at the top of the agenda if the country wants to move toward housing abundance and away from price shocks and housing inflation.
I’ve written about the insidious effects of the LIHTC. I’ve pointed out how difficult the credits are to use efficiently, and I’ve written about how the credit could be reformed and changed into a deduction builders and households directly. The bottom line is that LIHTC apartment units are now approaching $1 million per unit. There have been findings from watchdog agencies finding serious compliance issues and vulnerabilities to fraud in the use of the credit and lack of transparency. Where is all the money going? One would think that a tax credit that results in $13 billion in forgone tax revenue would have reporting requirements that could answer that question. The LIHTC has very murky data about what sorts of housing has been built, where, how much it cost, and whether it is still affordable. And I routinely point out that the cost of almost any LIHTC in the country is more than the purchase price of a single-family home.
What accounts for this broken system getting so much political support in spite of awareness of the high costs of producing housing this way? First, politicians like to cut ribbons. That might seem a bit flippant, but LIHTC projects are glitzy, new, and often incorporate all sorts of bells and whistles. The costs of certifying a building as exceeding legal requirements for energy efficiency, for example, are seen as high points not excesses because efficiencies serve another agenda.
All that money and complexity in the system means an industry of consultants, syndicators, lawyers, planners, accountants, and contractors who all are for-profit actors, making money from the froth of all the cash moving through the system. What I call the non-profit housing industrial complex relies on tax credits and multiple sources of capital squeezed from government and the philanthropic sector.
Finally, stacking capital is common in housing development. There can be multiple sources of borrowed money in a project. But when the sources of capital each have varying agendas, compliance requirements, and design demands, the result can be slowing down projects and adding layers of requirements that add costs to buildings. Things like requiring minimum sizes for units can limit unit counts in a project and drive up their per unit costs. It isn’t a question of bedroom count, but total unit size; more, smaller units, even slightly smaller, mean more rent income and more units at a lower cost per unit.
The answer to the wasteful LIHTC system is to start with more transparency and accountability. Let’s find out where all the money went and where it’s going? Next, some discipline on costs needs to be imposed. It simply isn’t true that affordable housing has to be more expensive. Then the credit needs to be shifted toward a more direct program of deductions for developers who include rent restricted housing in their projects that serve people with higher incomes and to households that struggle to meet housing costs every month. This would help more people faster and it would spare us the construction of Taj Mahal apartment complexes that make politicians, the media, and some advocates feel better, but do very little to address people on the margins of the economy.