The Low-Income Housing Tax Credit does not address the root of America’s housing challenges

The Low-Income Housing Tax Credit (LIHTC) is among the largest and most expensive federal affordable housing programs in the United States. Through federal income tax breaks to developers, this program serves to incentivize the building or rehabilitation of housing affordable to low-income families. Estimates by the Congressional Research Service find that this program costs 14.4 billion in foregone federal revenue annually. Despite recent budget cuts to many federal programs, the LIHTC has not only been maintained but expanded under the One Big Beautiful Bill Act.

As with all policies, there are trade-offs, and in the case of the Low-Income Housing Tax Credit, the trade-offs have been substantial. It is likely that its positive outcomes can be brought about through simpler, more widespread, and less burdensome means. While the LIHTC has maintained bipartisan support since its inception, it is worth considering whether alternative policies would better address current housing needs. 

How does it work?

The Low-Income Housing Tax Credit was established through the Tax Reform Act of 1986 and made permanent in 1993. Between 1987 and 2023, the Department of Housing and Urban Development (HUD) calculated that 3.7 million housing units had been created under this program. To achieve this, the federal government allocates population-proportionate federal income tax credits to states, which then distribute them to qualifying projects either directly or through a competitive application process.

To apply for the LIHTC, developers must set aside a minimum proportion of units meeting specified affordability requirements. These units can take a variety of forms, including multifamily developments or several detached single-family homes. Though credits are distributed over a period of 10 years, qualifying developments must maintain affordability for at least 15.

A development can qualify for one of two LIHTC versions–4% and 9%. Once developers are granted these credits, they sell them to investors to finance the costs of construction. Entirely new projects and substantial property rehabilitations are eligible for a 9% credit, which finances 70% of the cost of construction. For lighter repairs and property acquisitions, a 4% tax credit is offered, which then finances 30% of costs. The 9% and 4% figures are applied to specific construction costs, often referred to as the “eligible basis” of the property, to determine the size of the tax credit. Calculating the eligible basis of a property requires intimate knowledge of the tax code and the costs associated with each development. The complexity of calculating these credits and applying them remains one of the largest challenges of the program.

Despite its intricacy, the LIHTC remains a favorite among federal legislators. While many programs were slashed during the 2025 budget reconciliation, the LIHTC grew. The One Big Beautiful Bill Act permanently increased the number of 9% credits each state can give by 12% and loosened the financing requirements, environmental consideration incentives, and depreciation deductions for LIHTC properties.

Benefits

Through its nearly 40 years in operation, the LIHTC has been associated with several documented benefits. A 2019 study found that units built through this program have positive spillover effects, especially in low-income neighborhoods. Specifically, LIHTC developments are linked with lower property and violent crime, potentially due to the stability these developments provide for the community and the introduction of security measures. Further, low-income neighborhoods surrounding a LIHTC development have observed home price increases, though the opposite was seen for high-income neighborhoods.

Additional research has found a connection between LIHTC developments and locational efficiency. Locational efficiency in the context of affordable housing is the ease of access to everyday destinations like work, school, and shopping locations. Specifically, between 25% and 50% of LIHTC developments built from 2007 to 2011 were placed in location-efficient areas, meaning substantial transportation gains for residents. This benefit is particularly helpful because low-income residents have been priced out of these lucrative areas across the nation. The LIHTC program is one avenue for low-income residents to access locationally efficient areas and the benefits they bring.

Concerns

Despite some success, the Low-Income Housing Tax Credit has several major drawbacks. A 2010 study finds the LIHTC does not increase the overall stock of housing and instead produces a “crowding-out” effect. Rather than bringing in developers from other endeavors (like commercial development) to add to the stock of housing, the LIHTC is primarily utilized by developers already specializing in housing construction. A University  of Wisconsin study corroborates this finding, observing “no significant relationship between the number of LIHTC units (and other subsidized units) built in a given state and the size of the current housing stock, suggesting a high rate of substitution.”

The existing housing crisis is the result of a persistent housing shortage. The substitution observed by the available academic literature suggests the LIHTC does not address this fundamental problem.

Further, a 2009 study found that LIHTC developments are generally more expensive to construct than market-rate units, stating, “the program encourages developers to construct housing units that are an estimated 20% more expensive per square foot than average industry estimates.” In some notoriously high-cost areas, these figures have reached staggering figures, with per-unit costs as high as $898,837 in Chicago, and $708,000 on average in California.

There are several reasons for these high costs. First, basing the amount of tax credit awarded on the eligible basis of a development does not incentivize cost minimization. Further, the administrative costs of building affordable housing through this program can be steep. Receiving and using this credit requires extensive documentation and verification on behalf of the developer and their accountants, not to mention the administrative costs that come with housing development in general. Both the material and compliance costs of these developments exceed those of their market-rate counterparts. The LIHTC creates an incentive structure and regulatory framework antithetical to an efficient use of resources.

Finally, as with many subsidy programs, the LIHTC has been fraught with corruption. From several documented cases of developers inflating reported construction cost figures for larger credits to state officials leveraging credit awards for political gain, there are abundant opportunities for federal funds to be misused.

With so many remaining questions about efficacy, cost, and corruption, this program appears to have fallen short of its goals. As policymakers at all levels of government consider tools to address the ongoing housing crisis, it is important to consider alternatives to the LIHTC.

Conclusion and alternatives

The Low-Income Housing Tax Credit fails to address the root of existing housing challenges. It gets one thing right: there is a severe housing shortage, especially for low-income residents, and building more units is the answer. However, the documented benefits of the LIHTC are not necessarily program-specific and instead are the result of building housing affordable to low-income individuals in desirable areas generally. Other programs and market outcomes share the credit. Instead of expanding already overcomplicated and inefficient incentive programs, like the LIHTC, the government should consider stepping out of the way.

The National Low Income Housing Coalition estimates that the lowest income groups are short 7.1 million units as of 2025. Closing this gap is going to require building and entrepreneurship, not a burdensome regulatory process. Policies from rent control to restrictive zoning have made investing in housing affordable to low-income individuals either impossible or unprofitable. Easing rules around density, parking, and permitting would unlock new housing supply, something LIHTC struggles to deliver at scale. Even small legislative tweaks could bring about massive additions to housing supply with little additional cost to the taxpayer. Zillow estimated in 2019 that allowing duplexes on one in ten single-family lots could add over 3.2 million new units over the next 20 years across the 17 largest US metros. More drastic changes would bring more drastic results. Just in the Los Angeles area, Zillow notes that allowing four homes on 20% of single-family homes would “add more than 1.5 million more homes than allowing only one additional home on the same lots.”

Medium-density development is often less expensive due to its smaller size, making it ideal for low-income families. When local and state governments pass legislation allowing it, developers respond. Instead of continuing to distort these markets through a complicated tax credit, federal policymakers should encourage state and local officials to remove laws that discourage housing construction and allow regional adjustment to meet local housing needs. Supply expansion is possible without a middleman; it just must be allowed to happen.

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Source: https://reason.org/commentary/the-low-income-housing-tax-credit-does-not-address-the-root-of-americas-housing-challenges/