Americans are increasingly unable to cope with the ever-increasing costs of housing. Rising costs in Arizona and across our nation should be of interest to policymakers. One program that’s being used is the Low-Income Housing Tax Credit program. This program has been one of the largest suppliers of affordable housing throughout the past 30 years, but has had consistent struggles with increasing operational costs and questions over accountability and transparency. I’ve published a report with the Arizona Free Enterprise Club analyzing these concerns and recommending solutions for policymakers to consider.
What is the Low-Income Housing Tax Credit Program?
The Low-Income Housing Tax Credit (LIHTC) program operates by offering federal tax credits to developers who construct new, rehabilitated, or refinanced rental housing that meets affordability requirements set by the U.S. Department of Housing and Urban Development. This program uses federal tax credits but is administered by the relevant State Housing Finance Authority. In Arizona, this would be the Arizona Department of Housing.
Each state is granted the larger of $3.1 million or $2.70 per capita to distribute in a competitive allocation process. The competitive allocation process awards projects tax credits to new construction at approximately 70% of the cost of the project. There is also a non-competitive process for rehabilitation projects already being financed through federal bonds, awarding tax credits at approximately 30% of the project cost. Only the 70% tax credits come out of the amount allocated to the state.
Rising Construction Costs
Looking through national level data, we found the LIHTC program had around a 10% year-over-year cost increase in the amount of tax credits required to build one unit of affordable housing (adjusted for inflation). Additionally, our report compares LIHTC-financed housing to equivalent privately financed housing in Arizona and Washington state. We found housing construction financed with the LIHTC program correlates with significant increases in cost per square foot in Washington and increases in both cost per square foot and cost per unit in Arizona.
Lack of Oversight and Accountability
The LIHTC program provides a considerable amount of discretion to State Housing Finance Authorities during the competitive allocation process. The United States Government Accountability Office (GAO) published a report in 2018 summarizing these concerns. Their report criticized the lack of standardization, and sometimes complete absence, of cost management measures set by state HFAs and the high risk of fraud due to lack of oversight. Notably, the report found only 2 out of 57 LIHTC allocating agencies had limits on the development cost per unit and only 6 out of 57 LIHTC allocating agencies limited the amount of tax credits that could be issued per unit in a project. Additionally, just last year, a group of lenders entered into a settlement with the U.S. Department of Justice after an investigation revealed market manipulation by investors and developers utilizing the LIHTC program.
Our report discusses the concerns over cost and accountability of the LIHTC program in much greater depth, including suggestions on alternative ideas, such as tenant-based programs, to address the issue of housing affordability. The full report can be viewed HERE, as well as other reports by the Arizona Free Enterprise Club at www.azfree.org.
Everett Stamm resides in Washington DC and is author of the report ‘Analysis of the Low Income Housing Tax Credit Program in Washington and Arizona