Since the Low Income Housing Tax Credit (LIHTC) became effective in 1987, the credit allocation to states has remained fixed at $1.25 per capita. Thirteen years later, increased construction costs due to inflation mean that the same number of dollars buys less property and builds fewer units of housing. The need for housing continues to grow as affordable units convert to market rents and the supply of public housing dwindles, but the LIHTC has become a less powerful tool for the production of affordable rental housing.
The need for an increase in the cap is clear in the current fiercely competitive allocation environment. Some competition for tax credit allocations at the state level can be seen as a good thing; it promotes healthy examination of a project’s economic feasibility and its relevance in light of a given state’s needs. However, in certain states there are six to eight applications for each one that receives credits.
We remain hopeful for the passage of a tax credit increase before the end of the current administration. There has been a bipartisan consensus in the Congress to address poverty by engaging the private sector, as evidenced by the overwhelming margin that passed the Community Renewal and New Markets Act (H.R. 4923) in the House on July 25.
As well as increasing the LIHTC, the bill as passed in the House also made program changes to the Credit, including a requirement that states give preference to developments associated with community revitalization and in low-income rural areas. It provided greater flexibility to use the Credit with HOME funds and in low-income rural areas. It also made it possible to use the Credit to finance common areas such as facilities for Head Start, child care, job training, primary health care, youth recreation and support services for seniors in LIHTC developments, even where they are not for the exclusive use of tenants of the development.
The Senate has considered a Community Renewal and New Markets Act proposed by Senator Roth (S. 3152) which is similar but not identical to H.R. 4923. Where the House bill contemplates a gradual increase in the credit over five years to $1.75, with subsequent indexation to inflation, the Senate bill makes the entire increase effective in 2001, with indexation to inflation the following year. It is not clear whether the program changes contemplated by the H.R. 4923 will be included in the final bill.
If the LIHTC cap increase passes, what will be its impact? Nonprofit sponsors of tax credit projects can expect to benefit, as the amount of credit dollars set aside for nonprofit-sponsored projects will increase in proportion to the overall increase.
An expanded and improved LIHTC will increase the supply of affordable housing in distressed communities and the ability of housing developers to provide critical community services. If passed in the form contemplated by the Senate (immediate increase), a credit increase could result in the construction of 150,000-180,000 additional affordable apartments nationwide over the next five years. An immediate increase could also have adverse effects, however, if a sudden shift in the number of credits available results in the allocation of credits to projects in markets that will not support them. States will have to be diligent to ensure that markets do not become overbuilt and that the success of existing projects is not compromised by the construction of new projects. A gradual credit increase would be preferable in this regard, as it would not have such an abrupt effect on the market.
Since its enactment, the Low Income Housing Tax Credit has become the primary means of developing affordable housing in America. The Credit has proven its worth as a successful vehicle for private-sector investment in affordable housing and has achieved broad bipartisan support in Congress. An increase in the LIHTC cap will create critical housing opportunities for low-income renters at a time when growing numbers of working people and the unemployed do not have enough income to pay for decent and safe housing.