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Low-income Housing Tax CreditThe Low-Income Housing Tax Credit (LIHTC) is a tax credit created under the Tax Reform Act of 1986 that gives incentives for the development of housing aimed at low-income Americans. The Tax Reform Act of 1986 (TRA86) increased incentives favoring investment in owner-occupied housing relative to rental housing. The imputed income an owner receives from an investment in owner-occupied housing has always escaped taxation, but TRA86 changed the treatment of imputed rent, local property taxes, and mortgage interest payments to favor homeownership, while phasing out many investment incentives for rental housing. Since low-income people are more likely to live in rental housing than in owner-occupied housing, this would have decreased the new supply of housing accessible to them. The Low-Income Housing Tax Credit was hastily added to TRA86 to provide some balance and encourage investment in multifamily housing for the poor. The LIHTC directly subsidizes the development costs of low-income housing. Projects not funded by tax-exempt bonds can receive 70 percent of the development costs of a project through the tax credit. The developer can charge a maximum rent of 30 percent of the maximum eligible income, which is 60 percent of local median income for a family of four. The program is totally administered at the state level, with each state getting a fixed allocation based on its population. State housing agencies have complete discretion in terms of what types of projects to subsidize and where to subsidize them. This allows the states to address specific housing goals. States are also responsible for monitoring the ongoing development costs and quality of approved projects, and have the enforcement threat of stopping and recollecting the subsidy if the investor deviates once the development has started. As of 2002, as much as 40 to 50 percent of new multifamily construction has been developed under the program. The federal government spends roughly $3 billion annually on the LIHTC, and the outlay will increase significantly since Congress has increased the state allocations by 40 percent. A majority of tax credit projects also receive subsidies from other sources. These additional subsidies, which can include development grants and loans at below-market interest rates from local and state governments, account for a third of total capital subsidies. Thirty-nine percent of low-income tenants also receive rental assistance in the form of vouchers. See also: United States Department of Housing and Urban Development
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