The federal Low-Income Housing Tax Credit

The federal Low-Income Housing Tax Credit: Comparison

Please note this is a comparison between Version 1 by Victoria Basolo and Version 2 by Conner Chen.

The federal Low-Income Housing Tax Credit (LIHTC) is the largest production side-subsidy for lower-income housing in the United States.

LIHTC
low-income housing

1. Introduction

The need for affordable housing has become a tremendous problem in many countries in the last decade. In the United States, this need has been long standing, with lower-income households, in particular, struggling to find decent, affordable housing. In many U.S. metropolitan regions, housing units affordable to lower-income households are dramatically under-supplied and rent has reached extremely high levels. These conditions are especially visible in California, where the cost of land in many areas, particularly the coastal regions, makes the development of lower-income housing without significant subsidies an unrealistic endeavor.

The federal Low-Income Housing Tax Credit (LIHTC) is the largest production side-subsidy for lower-income housing in the United States ^[1][2][1,2]. Over the last two decades, the addition of LIHTC units to the housing stock has substantially increased, and the total number of units credited to the program is approaching three million ^[3][4][5][3,4,5]. Clearly, LIHTC has become a critical source of capital for the production of rental housing for households with lower incomes. Given the importance of the LIHTC program to lower-income housing development, researchers and policy makers have been interested in the operation of and outcomes associated with the program [1].

Research about the LIHTC program has proliferated as this program has grown from a relatively small, temporary effort to a large, permanent program. Housing policy scholars and housing practitioners came to realize that public housing was shrinking and its trajectory was unlikely to change [6]. While it was initially criticized as inefficient, the LIHTC program gained momentum as a result of programmatic improvements to eliminate some inefficiencies and the emergence of a reliable structure of participants in the process (i.e., investors, intermediaries, developers). Moreover, the political environment favored LIHTC-subsidized housing developed by for profit and nonprofit developers compared to housing produced by the government [7]. On the last point, the LIHTC presented attractive features to liberal and conservative leaders alike in Congress. For liberal-minded policy makers, the program produced much needed housing for lower-income households and, for conservatives, it removed the government from the direct development of housing; the latter was viewed as a smaller government goal for many conservatives. Other features of the program that were likely attractive to liberals and conservatives include the allocation of credits to every state, a substantial level of discretion at the state level in shaping the program objectives, more flexibility for state and local governments, and the status of the program as “off budget”, distancing it from the line item budget arguments that impact many programs ^{[8][9][10][11]}[8,9,10,11].

Many policymakers, researchers, and housing practitioners recognize the value of this program for generating capital for the production of lower-income housing. That being said, there has been concern about the location of LIHTC developments with respect to the concentration of minorities and poverty and the degree of access to services, as well as the presence or absence of other neighborhood characteristics. Research on the location of LIHTC units has increased in the last few years; however, there is far less research on the LIHTC program compared to contributions on public housing [8]. For this reason, in these contentis article, we focus on the quality of LIHTC neighborhoods by investigating demographic, economic, housing, and built-environment characteristics in LIHTC neighborhoods versus non-LIHTC neighborhoods. Specifically, our central research question asks, “Which characteristics are associated with neighborhoods that contain a LIHTC development?” We look at several types of characteristics at multiple geographic levels. First, we consider all neighborhoods in California as a whole. Second, we narrow our focus to the highly urbanized County of Los Angeles. Our purposes are to determine if there are differences in select characteristics between LIHTC and non-LIHTC neighborhoods and to determine if differences change across geographic scales in California.

2. The LIHTC Program and Existing Literature

The LIHTC program came into existence over 30 years ago through the Tax Reform Act of 1986. This legislation changed the tax rules on multi-family housing in response to the potential overbuilding of luxury or higher-cost units. The less favorable rules were intended to eliminate a perceived tax shelter abuse, but some members of Congress were concerned that the legislation would also negatively impact the lower-cost, multi-family markets. The LIHTC was developed to counter this negative impact. Although the LIHTC was initially adopted as a temporary program, it has been amended over time and eventually was made permanent by Congress ^[1][5][12][1,5,12]. An example of an amendment to the program was the 1989 inclusion of a financial benefit for a LIHTC development located in a Qualified Census Tract (a QCT is a census tract where 50% or more of the households’ incomes are less than 60% of the Area Median Gross Income) or in a Difficult Development Area (a DDA is an area with high construction, land, and utility costs compared to the Area Median Gross Income) [13]. The LIHTC is not contained in government housing regulations, but rather appears in the Internal Revenue Code (IRC). It is referred to as a tax expenditure or “off budget” program. The federal government distributes LIHTCs to states on a per capita basis, and the states provide these credits to housing developers. According to the IRC, a state must develop a Qualified Allocation Plan (QAP), which serves as the policy guidance document for the state allocation of credits to eligible developments. States set their own priorities for the geographic distribution of credits, as well as develop a point system reflecting a range of policy goals to evaluate the merits of development proposals submitted to the state. For example, a state might give points for green building or transit-efficient locations. While the federal government offers a base framework for the LIHTC program, the states have a good degree of flexibility in setting the income limits, period of affordability, and the goals for building and location-based features ^[14][15][16][14,15,16]. Developers compete for tax credits and, if successful, receive an allotment of these credits from the state to sell to investors. The investors apply the tax credits against their federal tax liabilities, and the capital raised from the sale of the credits covers some of the development costs of a lower-income housing project. LIHTCs are typically one of many sources of financing for a development. They tend to be the largest contribution to the total cost of production (land cost excluded), but bank loans, direct subsidies from local government and foundations, and other sources are important as well ^[17][18][19][17,18,19]. LIHTC utilization has grown over time, and this growth is paralleled by an increase in LIHTC research and contributions to the scholarly, policy, and practice literature. Moreover, the focus and substance of the LIHTC literature has changed over the years, reflecting larger housing policy concerns and the interdisciplinary interest in housing research. Table 1 is a summary of the themes in LIHTC research literature over time, beginning at the start of the program and continuing through 2018. T We divided the literature was divided i into eight-year intervals for convenience and to highlight the increase in scholarly production over time. This table is based on a search of two databases: Google Scholar and the Web of Science, using the topic “Low-Income Housing Tax Credit”. TWe reviewed the search results was reviewed andand chose relevant citations was choose to include in our compilation. In some cases, onlywe only had titles or abstracts need to be to reviewed, especially for older publications. Moreover, some of the articles retained in our compilation are not entirely focused on the LIHTC, but rather are comparative analyses across a range of housing programs of which the LIHTC is only one. While this search is qualitative, based on theour assessment of content, and not exhaustive, it achieves our goal of providing a good snapshot of the literature, including changes in themes over time.

Table 1.

Sample of Contributions to the LIHTC Literature Over Time.

Publication Period	Number of Articles Reviewed
1987–1994	Description and Critique ¹	12	^[12]^[20]^[21]^[22][12,20,21,22]
1995–2002	Description and Critique ¹ Legal Issues/Analysis Financial and Production Analyses	15	[18] [23] ^[10]^[24][10,24]
	Locational Analyses and Neighborhood Effects ²		^[25]^[26]^[27][25,26,27]
2003–2010	Risk of Inventory Loss Legal Issues/Analysis Financial and Production Analyses Locational Analyses and Neighborhood Effects ²	21	[28] [29] ^[30]^[31][30,31] ^[32]^[33]^[34]^[35][32,33,34,35]
2011–2018	Tenant Rent Savings and Rent Burden Financial and Production Analyses Qualified Allocation Plan and LIHTC Siting Locational Analyses and Neighborhood Effects ²	40	^[36]^[37]^[38][36,37,38] ^[39]^[40][39,40] ^[41]^[42][41,42] ^[2]^[3]^[43]^[44]^[45]^[46]^[47][2,3,43,44,45,46,47]

¹ As the LIHTC program aged, the description and critique tended to be integrated into papers with empirical analyses focused on other themes; when presented, authors may have provided direct or indirect critiques of the program. ² Locational analyses include the concepts of disadvantaged and low-quality neighborhoods. These concepts are measured in multiple ways in the literature and may involve a range of indicators (single- and multi-indicator measures) such as race/ethnicity, poverty, QCT status, access to employment, crime, school quality, crime, walkability, and others (see main text for an overview of some of these contributions). TheWe also included property value/price impacts of LIHTC developments were also included inin the locational analysis category .

Early research on the LIHTC program (1987–1994) tended to be published in taxation journals and focused on descriptions of the program and the relationship between real estate investment and the associated tax credits. However, also during the early period of the program, critiques of the approach to low-income housing financing, as well as one article aimed at helping local governments working with LIHTC-related proposals (see [21] for the latter), appeared in academic journals. The main critique emerging from policy scholars concerned the complexity of the program and the inefficiencies resulting from the program design [22]. As the LIHTC moved from a temporary to permanent program, legislative/administrative changes would ease criticisms of the program and, over time, further study of its operations would continue to produce recommended changes ^[48][49][48,49]. Interestingly, it should be noted that the LIHTC, as part of the tax code, is subject not only to direct changes to tax law, but also to indirect changes that could affect its operation [50]. The next phase of publications (1995–2002) was a transition period ushering in new and different topics. While descriptive analyses and qualitative criticisms continued during this time, they were joined by the exploration of legal issues associated with the LIHTC and the emergence of data-driven outcome analyses; these analyses are likely due to the availability of sufficient program-related data for analysis. Examples from this period of LIHTC research include the prediction of total LIHTC development costs using location and characteristics [10], consideration of a substitution effect of LIHTC units for non-subsidized units [24], an assessment of the application of the good-cause eviction protection in LIHTC housing from a legal perspective [23], a study of the race and ethnicity demography in LIHTC neighborhoods and other neighborhoods with federally assisted housing [27], and an analysis of the impact of LIHTC developments on nearby housing prices [25]. The third period of LIHTC literature (2003–2010) shows an uptick in contributions. Common themes emerge in the literature such as legal issues related to the LIHTC program, financial and production analyses, and characteristics associated with LIHTC development locations; the last of these themes often involves identifying and examining neighborhood quality indicators. Neighborhood quality analyses seem to be increasing, but significant variations exist across studies, including different study areas, the characteristics associated with the developments, the measurement of those characteristics, datasets under analysis, and the degree of comparison, (across-metropolitan areas, across housing assistance programs, or both). In this period, for instance, there was an examination of the LIHTC program in the context of the Fair Housing Act [29], consideration of the LIHTC units at risk due to expiration of affordability requirements [28], assessments of the cost effectiveness of the LIHTC program using California data [31] and a similar study using six metropolitan areas across the country [30], locational analyses including a study about the effect of LIHTC developments on nearby single-family home values in one county in Iowa [33], an analysis of Southern California LIHTC developments in terms of neighborhood poverty and access to employment [34], and a four-metropolitan-area study examining the spatial clustering of LIHTC developments and associations of LIHTC development locations with an array of socio-economic characteristics [35].

3. Neighborhood Characteristics and Effects on Residents

Whether neighborhoods matter to individual outcomes for persons living in them is a long-standing question in the social science and policy literatures. In fact, there is a vast among of literature examining neighborhoods and their effects. Despite all this effort and some empirical support for the argument that neighborhoods influence individual outcomes, researchers still only have a partial understanding of how neighborhoods might influence outcomes and what outcomes are affected by which attributes of a neighborhood ^[51][52][54,55]. Nevertheless, on a practical level, housing policy must proceed with a logical conclusion supported by some existing research that “bad” neighborhoods can negatively influence the outcomes of their residents, and “good” neighborhoods can increase opportunity and improve lives. Research following the implementation of various federal housing programs has investigated the neighborhoods of individuals receiving federal housing assistance. In particular, researchers and policymakers have focused on race/ethnicity and poverty concentrations in neighborhoods with assisted housing. This focus stems in part from the near-decade-long legal battle initiated by Chicago public housing residents alleging purposeful racial segregation of African Americans into substandard public housing developments in poor neighborhoods. This battle led to the 1976 U.S. Supreme Court ruling in Hills v. Gautreaux, finding the Chicago Public Housing Authority and the U.S. Department of Housing and Urban Development had racially discriminated in the public housing program and must respond with a desegregation plan to address the problem. The plan resulted in the movement of thousands of African American households to better housing and neighborhoods ^[53][54][56,57]. Research on this program suggested that relocating to less segregated, lower poverty neighborhoods had positive benefits for the movers ^[54][55][57,58]. The effects of poverty deconcentration was further investigated by researchers studying the federal Moving to Opportunity (MTO) program, which began in the 1990s. The MTO program was designed as a 10-year experiment (with control groups) and involved poor households with vouchers moving from higher- to lower-poverty neighborhoods. The results from MTO were mixed and thus disappointing to some policymakers and scholars who anticipated relocation to a lower-poverty neighborhood would bring many benefits to the members of mover households (see final results in ^[56][59]). Nevertheless, longer-term analyses indicate important positive outcomes, especially for children who moved out of poverty at an earlier age ^[57][60]. An early contribution examining several housing programs including the LIHTC program found that LIHTC developments tended to be located in neighborhoods with a concentration of minorities and poverty, even though poverty was higher in neighborhoods served by other housing programs [26]. Several years later, a study of an array of assisted housing programs using a national dataset found that LIHTC developments are more likely to be located in neighborhoods with a higher percentage of African Americans, higher poverty rates, and lower housing values, among other factors [27]. Many other studies have looked at the location of LIHTC developments and the poverty rates in the neighborhoods in which they are located. In general, the findings from studies indicate that LIHTC developments do tend to be in lower-income neighborhoods with higher poverty rates compared to market rental units; however, some researchers note size of development matters, LIHTC units are increasingly located in suburbs, and the program is making progress in situating units in lower-poverty neighborhoods with more racial diversity ^{[5][34][42][58][59][60]}[5,34,42,61,62,63]. Studies on LIHTC developments and racial/ethnic and poverty concentration often consider other neighborhood characteristics in their analyses. The neighborhood characteristics vary by study, with indicators such as the percentage of households on welfare, unemployment, housing quality, and school quality appearing in some analyses. Generally, these studies find that LIHTC neighborhoods tend to be associated with less favorable associations on these indicators ^{[26][30][61][62]}[26,30,64,65]. Moreover, related to location, researchers have examined LIHTC development sites to assess spatial clustering, access to jobs, exposure to traffic, and proximity to transit and related location efficiency. Findings from these studies reveal that LIHTC developments exhibit spatial clustering (at least in some metropolitan areas), have mixed findings on access to jobs, experience a good amount of traffic exposure, have low walkability, and are not as accessible to transit as policy makers may desire ^{[34][35][43][43][44][45][63][64][65]}[34,35,43,43,44,45,66,67,68]. The scholarly research on the neighborhood characteristics associated with LIHTC developments often reflects a connection to the practice of LIHTC policy. Specifically, some characteristics studied by researchers are explicitly mentioned in states’ LIHTC policy documents, the QAP. According to ^[66][69], “Many states prioritize proximity to transit” (p. 8) by offering amenities points in LIHTC proposal scoring with the goal of increasing employment opportunity and improving the environment. Access to parks or green (open) space is another locational characteristic that garners amenity points in some states’ QAPs ^[66][69]. The rationale for this amenity preference is clear in the literature; studies have found that parks and green spaces are correlated with better health outcomes ^[44][67][44,70], more physical activity ^[68][71], increased social capital ^[69][72], improved quality of life ^[70][73], and overall community well-being ^[71][74]. However, while LITHC development proximity to transit has been included in numerous LIHTC locational studies, these developments’ access to parks has not been examined widely. Overall, the research suggests that LIHTC development locations tend to be in poor-quality neighborhoods, based on a range of indicators. However, evidence from several studies indicates that improvement on some indicators has occurred over time. Attempting to generalize across the existing research is complicated by the myriad of study designs and study areas. In some cases, researchers compare the LIHTC neighborhoods to all other neighborhoods, while other studies include comparisons of different housing programs. Study areas also vary between case studies of a single metropolitan area and comparisons across multiple metropolitan areas (typically in different states), states, and the nation as a whole. These studies are not directly comparable. For example, the states have a great deal of flexibility in developing their LIHTC policies through the QAP, therefore, direct comparison on some outcomes is ill-advised. However, building a robust body of studies on the neighborhood quality of LIHTC developments is essential for drawing generalized conclusions and for future meta-analyses of these studies.