Poverty, Politics, and (Crony) Profit

Earlier this week, PBS Frontline ran a documentary titled Poverty, Politics, and Profit discussing major barriers to housing America’s poor. The show centered on the Low Income Housing Tax Credit (LIHTC) program, a federal program that subsidizes low-income housing construction.

Chris Edwards described Frontline’s LIHTC investigation well here. In short, the show found LIHTC costs taxpayers 66% more, but produced 20,000 fewer housing units than 20 years ago. Frontline made the case that the program’s failure is partly due to poor oversight and attendant corruption.

For those unfamiliar with LIHTC, Frontline’s narrative about developers’ outsized profits may sound extraordinary. But PBS does well to highlight a problem that the social sciences have long provided evidence for. For example, in Rethinking Federal Housing Policy, economist Edward Glaeser suggests that LIHTC’s “prime beneficiaries are the recipients of the tax credits, not poor renters …. [there] is little doubt that … a significant portion of program benefits accrue to developers.” And on the issue of LIHTC oversight, the Government Accountability Office flatly stated in a 2015 report that “oversight of the Low-Income Housing Tax Credit (LIHTC) program has been minimal.”

There are additional issues that were not covered in the Frontline piece. For one, the private market would produce the same housing in the absence of LIHTC subsidies. Economists call this phenomenon “crowd-out” and a recent study suggests “the impact of the [LIHTC] program on the [real] number of newly developed rental housing units appears to be small” because of it. In other words, LIHTC’s advocates are disingenuous when they pretend LIHTC-subsidized housing would not exist without government subsidy.

These issues and others provide good reason to reduce or eliminate the program. But despite the program’s many failings, Congress continues to look for ways to expand it. For example, this March Senator Hatch (R-UT) and other Republican legislators co-sponsored a bill to increase state LIHTC allocations. And last year Senator Wyden (D-OR) attempted to create a cousin program, the Middle Income Housing Tax Credit (MIHTC). 

It’s concerning when Republicans and Democrats find common ground in a crony business program, but it isn’t the first time. Some Republicans buy into the idea that tax credits are free (they aren’t) and other Republicans are pro-business rather than pro-market (the Ex-Im bank neatly illustrated this divide). Of course, redistributive subsidies of all stripes appeal to a majority of Democrats.

The point that Frontline makes – and it’s an important one – is that LIHTC isn’t effective even at what it tries to accomplish. Where LIHTC claims to support the poor, it excels at supporting crony business. Where it pretends to create new housing, it actually replaces equivalent, privately-produced housing with publicly subsidized development. Given mounting evidence of LIHTC’s dereliction, Republicans and Democrats should reconsider their support.