Ryan Found Section 8 More Efficient Than The Low Income Housing Tax Credit

So far, this series has looked widely at the War On Poverty and Congressman Ryan’s critique of the general approach of the War and calling it a failure. What’s happened in the last decade since that review, especially with housing programs. Although it was created in 1986 as part of tax reform, the Low Income Housing Tax Credit (LIHTC) is the premier federal housing program. As I’ve pointed out before, the program is extremely complex and difficult to use. First, let’s take a look at what Ryan found in his look at the program. Then, in the next post, I’ll describe the challenges I faced to just find out answers to simple questions about the LIHTC program like what entities have used it over the years, where, and how much has really been spent.

First, it is worth noting that you can find most, but not all, of Ryan’s material on line here. However, many of the links to some of the supporting documents are broken. But I have created a link to the 48 pages on housing programs and that’s what I’ll be referring here and in following posts. I’m not necessarily taking everything in Ryan’s materials at face value, but I’m also going to build from that work and try to fill in as much as I can about the programs as they are today.

The simplest way of understanding the LIHTC program is that it is a tax incentive program that lowers taxes for parties that invest money in housing that restricts rent usually to 60 % of Area Medium Income or less. The mechanics of the tax shift are complicated enough to warrant a post and I did one a while back that covers some of the mechanisms. The dollars that end up funding or subsidizing housing end up being allocated to the various states through what are called Housing Finance Agencies (HFAs) that determine how and where the resources will be used. I’ll cover the expenditure or outlay for the program in the next post, but the Department of Housing and Urban Development (HUD) says the program uses “the equivalent of approximately $8 billion in annual budget authority” and, according to Ryan’s documents, “provided the property remains in compliance, investors receive a dollar-for-dollar credit against their federal tax liability each year over a period of ten years.”

Ryan points out that, “critics of LIHTC often cite as a major flaw of the program the fact that LIHTC projects usually need at least one additional layer of subsidy to finance the project. Other criticisms include the complexity of LIHTC and its cost compared to other federal housing programs, particularly vouchers.”

My personal experience bears this out. As a nonprofit developer, the one project I worked on used multiple sources of capital from tax credits, to state and local funding. In and of itself, this isn’t a problem, but the many requirements from other government funders tend to slow projects down adding time and transaction costs. This hasn’t changed, and I’ve pointed out how new problems like inflation cause project costs to rise consuming the subsidy and creating fewer more expensive units.

In his section on LIHTC, Ryan compares the program unfavorably to Section 8, the program that gives vouchers that can be applied to rent in existing market rate apartments. I think it is a valid criticism and one that still applies today. The only problem is that vouchers are too hard to use. Often a household will qualify for vouchers but not be able to find a vacant unit that meets federal, state, and local requirements. Often the vouchers go unused. This is why I’ve continued to suggest the simple reform of allowing vouchers to be used where a household is already paying rent.

And who benefits from LIHTC versus Section 8? Ryan cites O’Regan and Horn who found that “about 40 percent of LIHTC units serve extremely low-income households compared to 75 percent of HUD’s Tenant-Based Section 8 and Public Housing units.” As I have dug deeper into where tax credits wind up, I have found that many, many projects that get tax credits mix together subsidized units with market rate units. That’s not a problem in my view, even if the income levels subsidized are higher.

But a look at projects like one forthcoming in Renton, Washington south of Seattle called Solera, raises questions; there’s nothing wrong with the project, but is it what taxpayers expect for “low income housing.” Are the rents so low in these areas anyway that the subsidy isn’t saving renters all that much, and the renters who are saving have much higher incomes, maybe high enough to find a cheaper, older market rate apartment? This is supported by data that found that “LIHTC properties tend to have a higher presence in suburbs with lower-poverty rates.” I tried to dig into this, and in the next post I’ll share it led to finding a much bigger problem with LIHTC: lack of transparency.

Finally, Ryan hits the nail I often hammer on. “In many metropolitan areas, LIHTC is more expensive than other forms of housing assistance.” Ryan cites a study that “examines the cost-effectiveness of LIHTC relative to Section 8 vouchers in Boston, New York, San Jose, Atlanta, Cleveland, and Miami.” That study found that “LIHTC is more expensive than vouchers on the whole, but the premium varies by voucher-payment standards and by local housing market.” In a city like San Jose, the study found, the tax credit program costs taxpayers 2% more than vouchers but in Atlanta, the difference is 200%. as expensive as vouchers in Atlanta.

Overall, Ryan doesn’t spend all that much time on the LIHTC program given its relative size. That could be because the program enjoys wide, bipartisan support. Could that be because there are many for profit developers padding their market rate projects with 4% tax credits, a shallower subsidy but easier to apply for and get? I think providing cheaper housing and making a profit is a good idea, but the question of how many tax credits get used by for profits versus nonprofits, and how they are being used led me to my biggest discovery: we just don’t know. Ryan’s work barely scratched the surface of a program that puts hundreds of millions of dollars into the coffers of state HFAs with very little accountability for where that money goes.