The Low-Income Housing Tax Credit (LIHTC) is the largest and most effective federal program to encourage the development and rehabilitation of affordable rental homes. Instead of relying on the federal appropriations process, the LIHTC provides financing support for affordable housing through tax expenditures. The program competitively awards tax credits to offset construction costs in exchange for reserving a significant number of rent-restricted units for low-income households.
Three major benefits of the LIHTC:
1. The LIHTC increases the supply of affordable housing
2. The LIHTC generates jobs and economic activity
3. The LIHTC revitalizes low-income communities
Encouraging private investment in entry-level housing in distressed communities
Unfortunately, no similar tax credit exists for affordable owner-occupied housing—the LIHTC’s myriad benefits are glaringly absent from the owner-occupied market, since LIHTC financing only applies to rental units. The severe shortage of entry-level housing prevents many low- and middle-income families from achieving homeownership—the primary wealth-building tool in America.
However, bipartisan members of Congress have introduced the Neighborhood Homes Investment Act to create a tax credit program to finance the building and renovating of owner-occupied homes in distressed neighborhoods. As with affordable rental housing, the gap between the cost of construction and the sales price is a major barrier impeding increases in the supply of entry-level housing. The Neighborhood Homes Tax Credit (NHTC) would encourage much-needed investment to overcome the hurdle of high construction costs.
Strengthening the LIHTC and establishing the NHTC would significantly increase the supply of affordable homes and address the supply shortage
The lack of affordable housing is a primary driver of high housing prices. The Affordable Housing Credit Improvement Act—which would increase LIHTC allocations among other changes to the program—and the NHTC would jointly financed over 2 million affordable homes over the course of a decade. Paired together, a more robust LIHTC and a new NHTC would meaningfully ameliorate the shortage of affordable housing and target a major source of the inflation experienced consumers.
A healthy affordable housing supply could also ease the burden of future inflation spells for families. Since housing is the single greatest monthly cost for most families, an abundant supply of affordable housing that can meet spikes in demand is important to ensure housing prices remain stable in the face of rising costs of living for families due to inflation.
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