Section 8’s big, clumsy brother: How the Low Income Housing Tax … – Niskanen Center

Congressional negotiators are racing to the lame duck deadline for a tax-extender package, possibly even this weekend. With topline spending amounts reportedly agreed upon, a variety of progressive priorities, including the Low Income Housing Tax Credit (LIHTC) and the Child Tax Credit, must now duke it out for the available funds.

The Low Income Housing Tax Credit (LIHTC) was created by the 1986 Tax Reform Act to supplant traditional public housing (Section 9) with privately provided, publicly subsidized rental housing. The LIHTC program offers tax credits to developers to build or renovate rental housing for low-income households. Developers can sell or syndicate credits to investors in the secondary market.

The program has become the largest federally subsidized housing program in the United States. In fact, it now provides more units than traditional Section 9 public housing did at the latters peak in the 1990s. It also recently surpassed the Section 8 voucher program. This is a testament to the success of the program in increasing the availability of income-restricted housing in the country.

At first glance, the LIHTC program looks to many like a supply-side progressive policy of the sort championed by Niskanen and lauded by commentators like Ezra Klein and Derek Thompson. But this is just a linguistic confusion: Providing a subsidy directly to a developer a building supplier doesnt make it a supply-side policy. It is a demand-side subsidy to the tenant in the form of lower rent, just like Section 8, but transmitted through the building owner instead of the tenant. As every economics undergraduate learns, the incidence of a tax or a subsidy who it formally applies to is distinct from the economic incidence of a tax or subsidy: who truly pays or benefits in the long run.[1]

Because they are both demand-side subsidies, LIHTC subsidies and Section 8 subsidies face the same actual supply-side constraints in the building and zoning codes. The zoning barriers that outlaw the construction of a market-rate multifamily building where tenants could use their Section 8 vouchers also ban an otherwise-identical LIHTC building.

There are some downsides to the LIHTC program. One downside is that it is administratively costly, especially when compared to other housing subsidies like Section 8 vouchers. The high overhead cost of LIHTC is a well-known fact among policy wonks. It dates back to at least an April 1992 comparison to Section 8 by the Congressional Budget Office and has been examined in decades of academic research since. Section 8 vouchers only require tenants to complete income test paperwork, whereas the LIHTC program also requires compliance monitoring of building owners. The marketing, sale, and syndication of tax credits in the secondary market add further administrative and transaction costs beyond simply giving money or vouchers directly to low-income people.

One large study of Californias LIHTC credit market found developers obtained just $0.73 per dollar of tax credit sold to secondary investors. Developers used those 73 cents of each subsidy dollar to build homes roughly 20 percent more expensive per square foot than the estimated construction-industry average.[2] By contrast, the incremental administrative costs for Section 8 average 10 percent or less of total Section 8 tenant-based spending.[3]

Another downside of the LIHTC program is its inflexibility. Because the program is address-based, it is not portable. This means that if a familys household size changes, they cannot upsize, downsize, or move without giving up their subsidy. The same immobility means LIHTC can also be a barrier to opportunity for workers who want to take a job in another area.

Despite these downsides, there are also some upsides to the LIHTC program. One potential upside is that it could be used to achieve spatial income mixing. We know from Raj Chettys Moving to Opportunity research that income-mixing matters for life outcomes at the zip code level. We dont yet have precise and granular estimates of the spatial level of income integration that matters for life outcomes whether it matters if incomes mix on a floor or a building versus on a block or zip code. But in theory, the program could be used to experiment with different income mixes.

Unfortunately, LIHTC is not consistently used to facilitate economic integration. The program theoretically allows the co-location of LIHTC and market-rate units in the same building. But the program heavily incentivizes 100 percent low-income buildings in practice. Compliance requirements for mixed buildings are so infamous that New York Citys compliance manual for LIHTC has a chapter heading titled Be Grateful if You Manage a 100% Tax Credit Property.

Though some state housing finance agencies prioritize high-opportunity neighborhoods for LIHTC construction, others tend to allocate credits to concentrated-poverty neighborhoods. On average, LIHTC does not promote neighborhood income inclusion as implemented today.[4] And it bears mention that Chettys landmark income-mixing experiment was achieved through Section 8 vouchers, not through LIHTC. Income-mixing can be a conscious goal of voucher policy, as well.

The primary upside of the LIHTC program is its political strength and durability. Because concentrated, highly motivated constituents in the private and nonprofit sectors beyond the actual tenant get their hands directly on the money, the program is considered an untouchable political dynamo. This makes it less likely that the program will be cut or reduced in the future. LIHTCs inefficiencies give it staying power, for better and for worse. Giving cash directly to families is the surest way to help them, but cutting out the rent-seeking middlemen also means fewer middlemen supporting the policy in Washington.

Overall, the LIHTC program has been successful in creating a durable coalition in favor of distributing rental subsidies to low-income tenants on a scale that recently exceeded Section 8 and LIHTC continues to grow. However, the program also has high inefficiencies, complex rules and regulations, and limitations in its ability to address the affordable housing crisis without supply-side reform to state and local zoning and building codes.

Policymakers in fiscally-constrained negotiations between competing benefit options for low-income families should seek out the most effective and efficient means of ending poverty. This will typically privilege direct cash transfers like the Child Tax Credit, followed by direct in-kind subsidies like Section 8. Complex and indirect options like LIHTC, by contrast, are popular for the wrong reasons and unlikely to provide the most poverty alleviation at the lowest fiscal and social cost.

[1] For example: Everyone recognizes Section 8 as a demand-side subsidy and paying it directly to the supplier in a Section 8 Project-Based Voucher doesnt magically turn it into an actual supply-side policy like upzoning or building code liberalization.

[2] Michael D. Eriksen, The market price of Low-Income Housing Tax Credits, Journal of Urban Economics 66, no. 2 (September 2009): 141-149.

[3] Roughly $2 billion in Section 8 administrative costs on $28 billion in Housing Choice Voucher spending not including Project-Based Voucher spending in a detailed study of administrative fees for fiscal 2014. See Abt Associates and Phineas Consulting, Housing Choice Voucher Program Administrative Fee Study Final Report, U.S. Dept. of Housing and Urban Development, August 2015.

[4] Ingrid Ellen et al., Poverty concentration and the Low Income Housing Tax Credit: Effects of siting and tenant composition, Journal of Housing Economics 34C (2016): 49-59.

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