The Low-Income Housing Tax Credit : HERA, ARRA and beyond

Abstract

The Low-Income Housing Tax Credit (LIHTC) has arguably been the most successful government subsidy to finance affordable housing. Since its creation in the Tax Reform Act of 1986 as Internal Revenue Code (IRC) Section 42, the LIHTC program has helped finance over 1,670,000 housing units. LIHTC has endured the test of time due to its strength both in the public policy and political spheres as well as its effectiveness in attracting significant private capital and in encouraging private oversight. The collapse of corporate earnings in late 2008 led to the subsequent collapse of the LIHTC syndication markets as demand for LIHTCs practically evaporated. Proposed affordable housing developments that anticipated receiving private investment through the sale of LIHTCs stalled. In response to the overall national housing crises, Congress enacted the Housing and Economic Recovery Act of 2008 (HERA 2008), which contained numerous LIHTC amendments. In early 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (ARRA), which temporarily converted the LIHTC program into a grant program. While HERA 2008 and ARRA were well intentioned, ARRA is a stopgap measure that could become costly to the US budget. This thesis argues that additional changes to IRC Section 42 should be implemented by Congress in order to reinvigorate the LIHTC syndication markets and improve LIHTC efficiency. This thesis will first provide a detailed, yet comprehensible, background on how the LIHTC functions.

(cont.) Armed with that background, the reader will then be introduced to the recent legislation affecting the LIHTC program. Finally, additional changes to the LIHTC will be proposed that, if enacted by Congress, should serve to further strengthen the LIHTC program and help revive affordable housing production. These changes include but are not limited to: expanding the passive investor rules to individuals, permitting LIHTC investors to carryback the LIHTC for five years, amending the LIHTC state allocation formula, accelerating the 10 year credit period, implementing methods to better control development and program costs, and expanding the Community Reinvestment Act.