Low-Income Housing Tax Credit (LIHTC)

Low-Income Housing Tax Credit

Background     NMHC/NAA Position     Current Status

Background 

The Low-Income Housing Tax Credit (LIHTC) is a public/private partnership that leverages federal dollars with private investment to support the production of affordable rental housing.  

Developers receive an allocation of LIHTCs from state agencies through a competitive application process.   They generally sell these credits to investors, who receive a dollar-for-dollar reduction in their federal tax liability paid in annual allotments, generally over 10 years. The equity raised by selling the credits reduces the cost of apartment construction, which allows the property to operate at below-market rents for qualifying families; LIHTC-financed properties must be kept affordable for at least 30 years.  Property compliance is monitored by state allocating agencies, the Internal Revenue Service, investors, equity syndicators and the developers. 

The LIHTC has two components. The so-called 4 percent tax credit can be used to subsidize 30 percent of the unit costs in an acquisition of a project and can be paired with additional federal subsidies. In contrast, the 9 percent tax credit supports new construction without any additional federal subsidies by subsidizing 70 percent of the costs.

The program has a long history of successfully generating the capital needed to produce low-income housing while also enjoying broad bipartisan support in Congress.  According to the National Council of State Housing Agencies, the program has led to the construction of more than 2.4 million units since its inception in 1986. Maintaining this supply of affordable housing supply is critical given that the market is short at least three million affordable rental units, according to Harvard University estimates.  The program has also been an important source of economic development for many communities, helping to revitalize struggling neighborhoods. At its peak, the LIHTC program created approximately 140,000 jobs and $1.5 billion in state and local tax revenues annually. 

However, the nation’s financial crisis has caused many of the LIHTC’s largest investors to withdraw from the program. As part of the American Recovery and Reinvestment Act of 2009, Congress enacted two now-expired tax credit exchange programs to bolster the beleaguered program.  Thanks to those programs and an improving economy, private capital has begun to return to the LIHTC program; but the program could be further improved with some specific legislative changes to extend the rates and increase program flexibility. 

NMHC/NAA Position 

NMHC/NAA urge Congress to protect the LIHTC program as it considers comprehensive tax reform and resist calls to eliminate it in search of a more simplified tax code.  We also would encourage lawmakers to make the following targeted changes to improve the program’s effectiveness:

• Support affordable housing financing activity by making flat tax credit rates permanent. In 2008, legislation (P.L. 110-289) fixed the rate on the 9 percent tax credit.  However, that reform measure is set to expire for properties placed into service on or after December 31, 2013. Given the current low interest rate environment, the actual value of the credit is likely to fall below the 9 percent mark, reducing investors’ activity in the affordable housing sector. NMHC/NAA propose to extend the fixed rate policy to the 4 percent tax credit, keeping financing flowing for acquisitions.
  
  
• Give the LIHTC more flexibility with “income averaging.” The Obama Administration’s FY2013 budget included a proposal that would allow tax credit properties to offer mixed-income housing through “income averaging.”  Current law restricts qualified rental units to either 40 percent of households earning no more than 60 percent of area median income (AMI) or 20 percent at no more than 50 percent AMI.  Under the new proposal, properties would remain in compliance if 40 percent of the units serve people whose average income is below 60 percent of AMI, allowing properties to serve a wider array of households, some earning above 60 percent AMI but still less than 80 percent of AMI.

Current Status

Although there are no comprehensive tax reform proposals currently moving through Congress, many members would like to see a simpler tax code that features lower rates and fewer credits and deductions.  NMHC/NAA are working diligently to remind policymakers that the LIHTC program is one of the nation’s most successful housing programs and should not be curtailed as part of any tax reform package. 

With regard to the proposals to enhance the LIHTC’s effectiveness, the Senate Finance Committee in August 2012 approved legislation to extend expiring tax provisions (S. 3521, the Family and Business Tax Cut Certainty Act of 2012) that includes language that would extend the 9 percent credit to LIHTC properties financed by credits allocated prior to January 1, 2014. The properties may be placed in service following that date so long as the credits are allocated during the applicable period. While the House has not yet moved its own version of tax extenders legislation, congressional action is likely during the lame-duck session set to convene in mid-November. Finally, it is noteworthy that on December 14, 2011, Representatives Pat Tiberi (R-Ohio) and Richard Neal (D-Mass.) and Senators Maria Cantwell (D-Wash.) and Olympia Snowe (R-Maine) introduced NMHC/NAA-backed legislation (H.R. 3661 / S. 1989) to make permanent the 9 percent and 4 percent credit amounts described above.

There has been no legislative action to address the income averaging proposal made in President Obama’s FY 2013 budget. 

Relevant Committees

• Senate Finance
• Senate Banking
• House Ways and Means
• House Financial Services

Contact Information

Matthew Berger
Vice President of Tax
NMHC/NAA Joint Legislative Program
202/974-2362
mberger@nmhc.org  

Last Updated: November 2012