On January 16, the chairmen of the Senate Finance and House Ways and Means Committees unveiled a $78 billion tax policy package known as the Tax Relief for American Families and Workers Act of 2024. The package includes two important housing provisions originally proposed in the bipartisan Affordable Housing Credit Improvement Act, which are aimed at strengthening the Low-Income Housing Tax Credit (LIHTC).
Here are a few things to keep in mind about LIHTC and the reforms included in the tax package.
LIHTC is the main federal tool for financing the development and rehabilitation of affordable rental homes. Since its creation in 1986, LIHTC has helped finance approximately 3.7 million rental homes serving approximately 8 million households. According to the most recent data provided by HUD, the median income of households in LIHTC-assisted units was $18,600 in 2021.
Here’s how it works: The federal government provides housing credits to states based on their population. State and local LIHTC-allocating agencies provide these credits to developers competitively, evaluating proposed projects using scoring criteria they outline in Qualified Allocation Plans or QAPs. Developers then sell these tax credits to outside investors, gaining equity for their projects. As a trade-off for reducing their financing costs, the government requires developers to maintain affordable rents in a percentage of their units for a certain amount of time.
There are two kinds of housing credits: the 9% and 4% LIHTCs. The 9% LIHTC provides a greater tax credit subsidy, making it more valuable, and is typically used for new construction without additional federal subsidies. In contrast, the 4% LIHTC has a lower subsidy rate and is paired with tax-exempt private activity bonds (PABs), requiring developers to finance a portion of their project with these bonds to access the credits.
The tax deal would increase the amount of housing credits that states can allocate. States receive annual allocations for their 9% LIHTCs based on a per-capita formula. In 2018, Congress passed a 12.5% increase over this base allocation, in effect providing more credits for states to fund affordable housing developments. While this initial increase expired in 2021, the proposed tax package would restore it retroactively for 2023 and extend it through 2025.
This increase can help address the growing gap between the supply of housing credits and developer demand for them: In 2020, developers requested nearly 2.5 times the amount of housing credits that were available to states. Additionally, expanded credit allocations can contribute to offsetting the increasing expense of building LIHTC housing.
The proposed reduction in the private activity bond minimum threshold needed to use 4% LIHTCs would allow states to fund more affordable housing. PABs are a federally-funded debt financing tool that states can issue for a variety of purposes—including subsidizing affordable housing construction. Developers interested in gaining access to the 4% LIHTC—and avoiding the competitive process involved in acquiring the more lucrative 9% LIHTC—can automatically qualify to receive the credit if they finance a minimum of 50% of their aggregate basis (the combined cost of building and land) using PABs.
The catch here is that states have a limit on how many PABs they can issue. By lowering the requirement to finance 50% of a LIHTC project with PABs to 30%, the tax package would allow states to spread their limited pool of PABs across more projects—also allowing more developers to access financing through the 4% LIHTC. This lower PAB threshold would likely increase take-up of the 4% LIHTC by developers, potentially reducing competition for scarce 9% credits.
What to expect going forward
The proposed LIHTC reforms represent a substantial step toward increasing the supply of rental homes affordable to some of the nation’s lowest-income households. Estimates suggest that these reforms could finance an additional 200,000 rental homes over the next two years.
On January 19, the House Ways and Means Committee approved the bill in a markup meeting on a 40-3 vote. At the time of this writing, it remains to be seen whether the package will garner the necessary support to pass both the House and Senate.
In the long term, any tax reforms will need to be revisited in 2025, when Congress will have to address the expiration of the Tax Cuts and Jobs Act of 2017.
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