Low Income Housing Tax Credit Faces Uncertain Future
Unless Congress acts quickly to fix an important technical issue, the development of affordable housing could be severely stifled.
The Low Income Housing Tax Credit (LIHTC) is the United States' largest rental housing production program and has been responsible for the creation of 42,735 affordable housing units in Minnesota since 1986.
According to the National Council of State Housing Agencies, LIHTC accounts for most of the country's new affordable housing to low-income people. Over 40 percent of all LIHTC units house extremely low-income households (ELI), according to a recent Furman Center for Real Estate and Public Policy study. ELI is characterized as a household that earns less than 30% of the area median income.
LIHTC encourages investment in the construction, rehabilitation, and preservation of affordable housing by providing tax credits over a 10-year period. These tax credits are awarded to developers, who in turn "sell" them to investors in return for the funding needed for construction and rehabilitation of affordable housing. In 2008, Congress replaced LIHTC's long-standing and complicated floating rate system for setting the value of tax credits with a temporary 9% fixed floor rate. This removed the risk and uncertainty associated with the floating rate and provides investors with a greater incentive to invest in affordable housing.
The 9% fixed floor rate provision will expire for affordable homes placed into service after 2013. Given that it typically takes 1 1/2 to 2 years to place LIHTC-financed projects into service, developers are already underwriting their proposals using the floating rate. This means that developers will need to look to public subsidies to fill financing gaps, which could stifle affordable housing development.
A 2011 Joint Center for Housing Studies of Harvard University report found that, despite the success of LIHTC, there is still an unmet need for 6.4 million affordable homes nationwide and that this number is growing. Unless Congress extends or fixes the 9% floor rate, even more Americans will continue living in unaffordable homes.
What is Congress doing about this urgent issue?
Bipartisan bills have been introduced in both the House and Senate during the 112th Congress to permanently extend the 9 percent floor.
The House bill, H.R. 3661, has eighty-five cosponsors, including Minnesota Representatives Keith Ellison, Erik Paulsen, Tim Walz, and Betty McCollum. The Senate bill, S. 1989, has twenty-four cosponsors, including Minnesota Senators Al Franken and Amy Klobuchar.
But these bills are not going to pass this year. Therefore the only hope for immediate relief is to get a one year extension in in the annual tax extenders bill. The tax tax extenders bill is an annual piece of legislation used to continue, for one year, non-controversial tax items that would otherwise expire at the year's end.
The Senate already included the one-year extension of the 9 percent floor in their tax extenders package, which was passed by the Senate Finance Committee with bipartisan support in August, 2012.
However, the House committee that could introduce a similar provision is severely limiting the scope of provisions to consider and may overlook the necessity of extending the fixed floor tax credit rate.
What can you do?
- Director of Finance and Contracting
- Community Development Program Officer