Housing Tax Credits: Inefficient and Inequitable

The Republican tax bill’s reduced corporate tax rate is a boon for many companies. But reducing the corporate rate lowers the value of tax credits and may negatively affect businesses that rely on them. The New York Times recently described one such case and argued that the value of the Low-Income Housing Tax Credit (LIHTC) would fall and the supply of affordable housing would fall along with it.

The Times article focuses on San Francisco and reports that the falling value of LIHTC increases building costs for affordable housing. In San Francisco housing is already in short supply, so increased costs are a real concern for low-income residents and city officials.

But this concern is misplaced; LIHTC is a complex and costly tool that should be eliminated. As Vanessa Brown Calder and Chris Edwards explain, the convoluted process which housing tax credits are distributed through creates large federal and state administrative costs, results in complicated application procedures and compliance efforts, and mostly benefits corporate interests rather than low-income tenants. The program is also susceptible to fraud and abuse.

These issues contribute to significant efficiency losses. As a result, LIHTC projects are more costly on average than equivalent private projects. In the end, the program’s intended recipients may receive just 24 percent of the LIHTC subsidy. Corporate interests capture the rest.

Considering the program’s inherent problems, officials should contemplate other strategies to increase housing affordability. One option is to eliminate project-based assistance, including housing tax credits, and rely more heavily on tenant-based assistance (e.g. housing vouchers).

In the summer 2015 issue of Regulation, economist Edgar O. Olsen suggests this approach. Olsen contends that project-based assistance is more costly than tenant-based assistance, and as a result contributes to longer waits for low-income units. That means fewer of the lowest income families receive assistance.

Since 70 percent of households receiving rental assistance receive project-based assistance, there are major gains to be gained by shifting resources toward tenant-based assistance. Olsen estimates that increasing tenant-based assistance would cost 10 percent less and serve 75 percent more people than the status quo.

That’s helpful, but addressing the underlying causes of housing affordability issues would be even more effective. One cause of housing affordability issues is restrictive land use regulations and zoning. In a recent analysis, Calder found that in 44 states more intensive land-use regulation is associated with increasing home prices. 

Unfortunately, regulatory barriers to affordability continue to grow. In San Francisco and other heavily regulated coastal cities, removing regulatory barriers could substantially increase housing supply and lower costs.

And if zoning reforms were combined with replacing programs like LIHTC with tenant-based assistance, officials could increase housing supply, lower housing costs, and more effectively provide subsidies to people who need them. Unfortunately, the Times article suggests damaging proposals like increasing the size of LIHTC and applying rent controls.

That is not an effective solution if improving housing affordability is the objective. Instead, officials should cut regulations that create supply shortages and move towards more effective forms of housing assistance. LIHTC isn’t one of them.

Written with research assistance from David Kemp.