The Low-Income Housing Tax Credit (LIHTC) awards roughly $14 billion in tax credits annually to private apartment building developers in exchange for keeping rents capped for lower-income tenants. But far from being an effective solution to housing affordability, the LIHTC is a complex and costly form of corporate welfare. It is also a microcosm of what is wrong with the House-passed Republican tax bill, which expands the credit by 12.5 percent, one of at least 20 new or expanded tax subsidies.
A new bill from Representative Glenn Grothman (R‑WI) charts a more reasonable path. The Low-Income Housing Tax Credit Elimination Act proposes repealing the housing credit. This is a long-overdue reform.
For almost 40 years, the LIHTC has enjoyed bipartisan support, but that doesn’t make it a good policy. The credit inflates construction costs, crowds out market-based development, and funnels most of its benefits to investors and developers instead of renters. It’s refreshing to see Representative Grothman recognize the reality of the program’s failures rather than falling for special interest pleas, as is often the case on Capitol Hill.
Earlier this month, my colleague Chris Edwards testified before the House Oversight Committee. He lists five problems with the program:
Complexity. The LIHTC has spawned a compliance industry of lawyers, accountants, and consultants. The statute, IRS regulations, and compliance guides span more than 2,000 pages, entailing huge bureaucratic overhead.
High costs. Due to unnecessary rules, fees, and bureaucratic delays, LIHTC-financed projects often cost 20 to 40 percent more per unit than comparable market-rate developments.
Fraud and corruption. With minimal oversight, the program is ripe for abuse. Because state and local officials have discretion in awarding credits, it has been associated with numerous scandals involving public officials and politically connected developers.
Doesn’t help renters. Statistical studies suggest that as much as two-thirds of LIHTC benefits are captured by investors and developers, rather than tenants, through lower rents.
Crowd out. Rather than expanding the overall housing supply, LIHTC projects often displace or delay private construction that would have happened anyway, adding costs without adding new housing units.
Subsidies Are Not the Answer
Instead of throwing more money into a broken program, Congress should focus on reforms that remove government barriers to building more houses. Many of these supply constraints exist at the state and local levels, and policymakers with the appropriate jurisdiction should pursue those reforms.
At the federal level, lawmakers should fix the overly long depreciation schedule for multifamily housing. Under current law, the cost of a new apartment building is deducted from taxable income over 27.5 years, raising effective tax rates on investment. At 2 percent inflation, the value of investment deductions spread out over more than 27 years declines by 44 percent. Allowing immediate deductions for new housing construction would lower the cost of new construction and could add 2.3 million new units to the housing stock.
The Republican tax bill includes immediate deductions for manufacturing structures through 2029. Expanding similar treatment to residential buildings would improve the bill and eliminate any argument for expanding the LIHTC.
As Edwards notes in his testimony, “Congress enacted the LIHTC in the Tax Reform Act of 1986 to lessen the blow from that law’s increase in the write-off period for apartment buildings from 19 years to 27.5 years.” The experiment has failed. Instead of expanding the credit, it is time Congress repealed the LIHTC and returned to a system of more generous deductions for residential structures.
These are the kinds of reforms that actually lower costs and ensure markets meet demand, no tax credits required.