LIHTC in the balance: Tax-loophole or social policy?

by Ryan Sloan on Aug 30, 2011

Part I in a series that will examine the congressional super committee and the Low Income Housing Tax Credit program

At several points during the debate over raising the debt ceiling, Washington appeared to be headed towards a “grand compromise”. Such a deal would have mixed broad ranging cuts, including cuts to entitlement programs, with revenue-increasing tax reform. While tax reform is certainly not a novel policy proposal, it is one that has gained traction in recent months as politicians and policy-wonks alike have searched for solutions to the country’s mounting debt-crisis. It is also a policy proposal that has drawn the attention of the affordable housing industry, as industry advocates fret over the future of the Low Income Housing Tax Credit in a world without tax-loopholes. The debt-deal that eventually emerged could hardly be labeled grand, but the possibility for a “grand bargain” including tax-reform remains alive, with responsibility for a deal shifted to the so-called “super committee”.

The call for tax-reform has been mounting for months. In November of 2010, the Bipartisan Policy Center’s Debt Reduction Task Force released a report that suggested, “An end to almost all tax expenditures to offset the costs of the much lower tax rates”. The President’s Economics Recovery Advisory Board released a report in August 2010 which called for, “Eliminating specific expenditures [to] improve efficiency while simplifying the tax code”, and perhaps most notable of the slew of reports, The National Commission on Fiscal Responsibility and Reform (more commonly referred to as the Bowles-Simpson report) called for a comprehensive tax reform that would, “Sharply reduce rates, broaden the base, simplify the tax code, and reduce the deficit by reducing the many ‘tax expenditures’—another name for spending through the tax code.”

image courtesy of flickr user @schnaarsWhile the reports agreed on tax expenditure reduction, they disagreed on the scope of the reform. The Commission on Fiscal Responsibility offered two scenarios of expenditure reduction, a “zero-plan” that would, “reduce income tax rates to as low as 8%, 14%, and 23%”, and a less extreme reduction allowing for some remaining tax expenditures. The Bipartisan Policy Center distinguished between expenditures with, “little economic justification” and those that, “promote important social and economic goals”. This distinction is an important one, as industry advocates have been fighting to cast the Low Income Housing Tax Credit as a tool of social policy as opposed to a corporate tax break.

If the tax credit industry was alarmed in the months leading up to the debt-ceiling debacle, indignant might best describe the response to Sen. Tom Coburn (largely symbolic) debt-reduction proposal, which called for an elimination of the program. The plan, entitled “Back in Black: A Deficit Reduction Plan” referred to the LIHTC program as “both inefficient and duplicative.” In response, The Affordable Housing Tax Credit Coalition (a national trade association comprised of many of the major participants involved in the low-income housing tax credit program) issued a rebuttal the proposal, citing numerous justifications for the program, including a recent report by Harvard’s Joint Center on Housing Studies which labeled the LIHTC program, the “most successful federal affordable housing production and preservation program in the nation’s history”.

Now that the responsibility for deficit reduction has shifted to the 12-member congressional “super committee”, the affordable housing industry is left to wonder whether the tax credit program is still in danger. In an attempt to gain a better understanding of how the committee might weigh in on the program, in the coming weeks we will be break down committee’s previous allegiance to affordable housing causes.

{ 4 comments… read them below or add one }

David Gaby September 25, 2011 at 3:19 am

I would be interested to see this debated. We have been seeing bad projects get LIHTC funding for a number of years, and these projects have effectively evaded review under the HUD Site and Neighborhood Standards, and have created a high degree of segregation of racial minority groups and lower-income families in traditional areas of minority concentration. What justification is there for continuation of this program in its current form? What alternatives might the committee consider, and how might citizen groups impact on these considerations?


Julie Johnson September 26, 2011 at 4:09 pm

Although I have major problems with labeling racial or ethnic density as a characteristic of a “bad project” – no one seems to think that about predominately Caucasian neighborhoods; I do agree with the notion of altering tax credits to promote more mixed use development. We have numerous successful projects in Minnesota that are mixed use – business, market rate, Section 8, and high end in the same building.


paul dribin September 28, 2011 at 8:07 pm

The tax credit program is critical for the success of affordable housing. There have always been major problems with the program. It is expensive, complicated, and has overly high transaction costs. It does not house the lowest income population and is difficult to do in rural areas. We need a new program along the line of the 221d4 BMIR Program


Dave Wakefield October 5, 2011 at 8:00 pm

David – The current menu of tax and incentive options help city and state planners address a variety of needs that are unique in each area. If complaints are in order about the relative mix of affordable housing, or too much affordable housing in areas with the wrong demographics, isn’t that the responsibility of the state housing authorities? Changing the tools state planners have available to them will not change their planning priorities. Those priorities should be addressed at the state level rather than by tinkering with a program that has been enormously successful in creating affordable housing.

Paul – You are right that the tax credit program is critical for the success of affordable housing. What type of program do you think is needed along the line of 221d4? Interest rate subsidies would provide even less incentives for housing that addresses the lowest income population. That is why 221d4 programs are typically further subsidized with other rental assistance.

The need for affordable housing and the market, demographic, political and neighborhood issues affecting the supply create a complex set of problems. In the business/corporate world we long ago gave up seeking simplistic solutions for complex problems except when the root causation factors are wrong in fundamental ways. It is important to address specific problems and find real solutions and not get tempted to throw out the whole mess and start over. Most of the time that creates even worse outcomes in my opinion.

The history of government programs in setting “fair” prices demonstrates that they do a much worse job than the marketplace. As an example, medicare currently pays more for many drugs than private insurer reimbursements. There is no evidence to suggest that HUD-set or SHA-set rents, as used in 221d4 programs, would do a better job than the LIHTC program. The LIHTC program, with its market-based measure, has been enormously more successful than any other housing program.


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