The Fight to Expand the Low-income Housing Tax Credit

As time runs out for Congress to pass legislation this year, state officials dealing with the national shortage of affordable housing are hoping lawmakers will restore nearly $100 million a year in additional federal tax credits to build housing for low-income households.

Congress in 2018 temporarily increased the amount of the tax credits the federal government gives each state to build low-income housing by 12.5%. But that increase went away in 2021.

That reversal meant a loss in the amount of credits nationally from $935 million last year to $870 million this year, just as rents were skyrocketing and rising land prices and supply chain problems raised the cost of building more affordable homes, Stockton Williams, executive director of the National Council of State Housing Agencies, said in an interview.

Andrea Bell, executive director of Oregon Housing and Community Services, said in a separate interview that, “the expiration of the 12.5% increase, it came really at the worst possible time.”

Combined with another proposal that would allow states to build more affordable housing using a specific type of municipal bond, restoring the increase could lead to the construction of 1.54 million affordable homes, according to an estimate done on behalf of the association of state housing agencies.

However, restoring funding for what the U.S. Department of Housing and Urban Development calls the nation’s “most important resource for creating affordable housing” will require Congress to pass a tax bill in the next few weeks. With the legislation tied up in uncertainty over whether Congress will approve separate federal budget legislation, the prospects are uncertain.

“I’m a big supporter,” Senate Finance Chairman Ron Wyden, an Oregon Democrat, said in an interview, referring to restoring the 2018 tax credit increase.

But then asked about the chances of passing a tax measure by the end of the year, Wyden was less certain. “We’re going to do the best that we can,” he said.

Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, was also non-committal about including the affordable housing credits in a tax bill. 

“I am optimistic that before year-end, we can reach bipartisan agreement in crucial areas of tax, trade, and healthcare, in areas that have long been supported by Republicans and Democrats alike,” he said in a statement to Route Fifty. “Certainly, with the economy in a looming recession, I’m hopeful Democrats can join us in working together on these issues.”

Under the Low-Income Housing Tax Credit program, states are given federal tax credits, which they can pass on to developers. The developers can then sell the credits to investors to raise money to build more housing for lower-income people.

The program is seen as essential in addressing what the Biden administration considers to be the main driver of rising housing costs: a lack of housing.

New housing construction compared to the population has been on the decline since the 1970s and became “particularly pronounced after the peak of the 2000s housing bubble,” Jared Bernstein, a member of the White House Council of Economic Advisers, and other experts wrote in a policy blog released by the White House last year.

As a result, the experts noted that Freddie Mac estimates the nation has a shortage of nearly 3.8 million homes, substantially higher than the estimated gap of 2.5 million homes in 2018.

The shortage is even worse for homes affordable to extremely low-income renters, according to an analysis by the National Low Income Housing Coalition. The advocacy group estimates there is a shortage of seven million homes for those with very low incomes.

“Without affordable housing options, 72% of America’s lowest-income renters spend more than half of their limited incomes on housing, putting them at increased risk of evictions and, in worst cases, homelessness,” according to the analysis.

The tax credits, Bell said, are essential in dealing with the shortage by giving developers hundreds of millions of dollars to help cover the cost of building more low-income housing.

“Many developers will tell you that it is just simply economically infeasible for them to build rental housing, without the equity that is derived from the credit, unless they charge rents that are way above and out of reach for too many families with low incomes,” she said 

The credits are “highly sought” by developers in North Carolina, said Scott Farmer, executive director of the state’s Housing Finance Agency.

“We are a fast growing state, one of the fastest growing in the country,” he said. “When you have folks moving in, it puts a tight crunch on the available housing stock. Unfortunately, you're just not able to build enough to keep up with that pace.”

As a result, rents have increased by around 30% around the state and 50% in some places in the past couple of years.

The housing credits, though, can substantially reduce rents for low-income people, Farmer explained. “You may see rents for somewhere around $1,800 to $2,400 per month,” he said. In contrast, rents in a unit financed with the tax credit could be between $1,000 or $1,500. 

“It can be a significant difference,” Farmer added.

The state received 120 applications for credits from developers last year. But after the increase in tax credits expired, the state could only give credits to 28 projects this year, he said, seven fewer than last year.

“We saw an immediate reduction in the number of deals that we could do,” he said.

In Illinois, as well, the amount of tax credits available to the state is lower than the demand, especially after the reduction in credits, said Kristin Faust, executive director of the state’s Housing Development Authority.

“If we have requests from over 50 different developers, we can maybe fund 20 to 25 of those developments,” she said. “And it is at a time when rents have gone sky high.”

The state is seeing a “proliferation” of apartments that cost $2,000 to rent, Faust said. “But we are not building enough properties that will rent for $800 a month. $1,000 a month,” she said. 

In a positive sign, a bipartisan group of 50 members of the House lamented the loss of the tax credit increase, urging Congressional leaders last week to restore it.

“Due to congressional inaction to extend this increase, every state is now facing a 12.5 percent cut to Housing Credit resources during an affordable housing shortage,” wrote the members led by Reps. Suzan DelBene, a Washington Democrat and Brad Wenstrup, an Ohio Republican.

A White House spokeswoman did not return a request for comment on the need for more affordable housing tax credits.

Williams, though, said an administration official told housing advocates, during a meeting at the White House on Nov. 16, that the next few weeks will be “crucial” in restoring, if not expanding, the 2018 increase.

In part, that’s because a push to pass tax legislation is an opportunity to restore the tax breaks, Williams said. 

More than a dozen tax breaks for everything from business lunches at restaurants to renewable energy are set to expire by the end of this year, according to Congress’ Joint Commission on Taxation. As a result, a variety of interest groups are pushing for Congress to pass legislation by the end of the year to extend the breaks. Amid the housing crisis, “it ought to be a no brainer” that restoring the 2018 increase in housing credits be included, Williams said.

In addition, with Republicans taking control of the House in January, “there's a recognition that it might be harder to pass big legislation next year, because we'll be in a divided government,” Williams said. 

It’s unclear, though, how much of an increase there could be or if there will even be one at all.

With the cost of building low-income housing developments skyrocketing, Williams and housing directors are pushing for a larger increase than the restoration of the 12.5% increase House members sought in the letter to congressional leaders.

Many signers of the letter, including DelBene and Wenstrup, were part of a bipartisan group, who proposed in the Affordable Housing Credit Improvement Act last year that called for not only restoring the 12.5% increase, but also phasing in an additional 50% increase in the credits beyond that baseline level. Accounting and consulting firm Novogradac estimated this further boost would lead to more than 384,000 additional affordable rental homes over about a decade.

Faust, for example, said a recent analysis by her agency found that the cost of building an apartment building in the state has gone up by 30% in the past 24 months. 

“That’s why we’re calling for 50%,” she said.

In addition, the advocates and the 50 House members are calling for a change involving affordable housing projects built with the PABs known as private activity bonds. Developers can receive the full amount of tax credits if half the cost is paid with the bonds. However, Williams said that eats up a cap on the bonds that states can authorize each year. Lowering the requirement to 25% would allow states to finance more projects with the bonds without hitting the limit.

John Buhl, spokesman for the Urban-Brookings Tax Policy Center, said that while so-called tax extender bills are usually passed without much fanfare, the discussions are complicated this year by a partisan push by Democrats to include a restoration of the American Rescue Plan’s expansion of child tax credits, which expired at the end of last year.

Also complicating things, he said, is whether Congress will pass a tax measure if they cannot agree on a full-year omnibus budget and pass only a short-term continuing resolution.