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By Kent Watkins

This month marks the 27th anniversary of the federal Low Income Housing Tax Credit (LIHTC) program. Throughout the program’s tenure, what lessons have we learned? What key components continue to make it a successful program?

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To celebrate the anniversary of the tax credit this month, the Academy will take note by having its monthly luncheon conversation led by BPC Commissioner Bobby Rozen, then staffer to Senator Mitchell, and Fellow Chuck Edson. Both were key players in the writing of the tax credit legislation and Edson went on to found several national trade associations to help support the continuation of that Act.

In February, 2013, the Housing Commission recommended – in the midst of efforts to curtail or ‘reform’ all tax credits – an expansion of the LIHTC by 50 percent over current funding levels and the provision of additional federal funding to help close the gap that often exists between the costs of producing or preserving LIHTC properties and the equity and debt that can be raised to support them.

There is no doubt that the tax credit in general, and to the housing industry that depends on it, is perceived to be in the fight of its life, despite claims of its efficiency and production prowess. To those, however, who see severe ‘mission creep’ and backdoor efforts to avoid direct appropriations by legislative committees, it is a cancer to be eradicated or at least tamed. Another Academy Fellow, John Koskinen, former chairman of Freddie Mac, and now nominated for the head of IRS, may find that he has more than the 501(c)(4) attacks on his agency to defend. Some additional points:

  1. Although the LIHTC is now looked at as a brilliant move for the low-income housing industry, it should be remembered that it was a ‘desperate’ attempt to substitute something for the train-wreck in 1986 occurring that decimated rental real estate and individual tax deductions from average American taxpayers. The limits on rental income from this substitute still created a gap that must be filled to meet the debt level. Section 8, HOME, and other like components are efforts to do that. But, as the Housing Commission pointed out (p. 91), there still needs to be an increase in the amount of tax credit allocations and gap funding, especially since HOME funds have been cut so drastically. Perhaps a return to some of the earlier ‘middle-class investor’ deductions that the 1986 knocked out? The renters’ tax credit proposed by the Center on Budget and Policy Priorities is one suggestion; Ron Terwilliger’s recent ULI Report increasing the overall support of rental housing for multi-family developers to equal the current deductions allowed by taxpayers to homeowners, including second homes/boats, etc.
  2. The rapid decline and phasing out of public housing stock, one of the means of housing low-income populations, seems inevitable in the next 20 years. Part of the new/old paradigm is the HOPE VI/CNI/RAD (Rental Assistance Demonstration) as they provide an option for conversions to FHA-like properties with concomitant risk (unless the too-big-to-fail rule is revised downward, as it sometimes is for defaults).
  3. Even though the foreclosure rate has been very small (.62%, 98 properties vs. 16,000 total properties) from the tax credit program, Mr. Koskinen should order a zero-based audit sample of what is ‘happening’ and not just wait for the shoe to fall and then react to it. Is there an early-warning system in place?
  4. The Housing Commission extols the federalism aspect of allocating tax credits through the states. However, the diversity argument should also be balanced with national needs as well. Further studies should point out the anomalies and dysfunctions that we all experience as we ‘travel’ from state to state to find the best environment for a particular project. An example: during the HOPE VI process of 2010, I was writing the grant for the Denver Housing Authority and came across the problem of HUD’s point system only rewarding states that had allowed for multi-year commitments. Seventeen states had seen the advantage of amending their QAPs to help PHAs get that extra point or two. Colorado was not one of them. However, after considerable discussion, they agreed to change their rule, not just to help Denver, but to any housing authority in the State that would apply for HOPE VI. Result: Denver Housing Authority won the grant ($22 million plus $90 million of other leveraged financing) and those points made the difference vs. other PHAs who scored as well, but didn’t reside in states with that provision.

Happy anniversary, LIHTC. Keep truckin’ and keep improving your toolkit!

Kent Watkins is the Chairman of the National Academy of Housing and Sustainable Communities.


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