Author: Preston Brashers
TOPLINE:
The One Big Beautiful Bill (OBBB) expanded housing developers’ access to Low-Income Housing Tax Credits (LIHTCs).
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The Tax Reform Act of 1986
created the LIHTC with the intention of incentivizing housing developers to build or rehabilitate “affordable housing.” Roughly speaking, the LIHTC includes two alternative types of credits—the “9 percent credit,” and the “4 percent credit”—that developers can claim each year for 10 years. Both credits are distributed by state housing agencies to developers. Each state receives an allocation of 9 percent LIHTCs based on population (with a fixed minimum for small states). To qualify for the 4 percent credits, at least 50% of the basis in the building had to be financed with tax-exempt private activity bonds. Therefore, state and local governments (ultimately taxpayers) shared some of the cost of 4 percent credits.
The LIHTC is only allowed for the share of units rented by low-income residents, so receiving the subsidy depends on income verification of tenants. The credits are governed by complicated federal and state rules. In 2023, the Novogradac & Company LLP published a 1,798-page LIHTC Handbook to help developers navigate the credit.
What OBBB Did:
- Increased LIHTC allocations based on state population (9 percent credits) by 12%.
- Increased the federal share of the 4 percent credits by relaxing the tax-exempt bond threshold from 50% to 25% to qualify for the lower 4% credit rate.
Why It Matters?
- LIHTC subsidies are paid to housing developers, not low-income households.
- The subsidies haven’t led to discernable improvements in housing supply or rents.
- In 1985 and 1986 (when the LIHTC was established), 7 million housing units were completed each year, and that figure had risen five straight years.
- After the LIHTC was enacted, the number of units completed fell each of the next five years.
- In the past 40 years, only in 2004-2006 (before the housing crash) did the number of new private units completed exceed the 1985-1986 level.
- Rents have risen 24% more than overall prices since the LIHTC was created.
Where Can I Find Changes?
OBBB Sec. 70422; 26 U.S.C. § 42(h).
BOTTOMLINE:
The LIHTC is bad policy that enables state housing agencies to dole out subsidies. Most conservatives oppose LIHTC expansions, but the unfortunate compromise on this $15.7 billion subsidy expansion shouldn’t overshadow the passage of several trillion dollars of good tax policy in OBBB.
This memo is part of the One Big Beautiful Booklet, a collection of more than 60 memos that examine and summarize the major aspects of the One Big Beautiful Bill – the signature legislative achievement of President Trump and the 119th Congress.
more ob3-60 memos
