A Missed Opportunity? The 4% Low-Income Housing Tax Credit Program

Abstract

The Low-Income Housing Tax Credit program is the largest housing production subsidy in the U.S. Two types of credit, known as the 9% credit and the 4% credit, are subject to different allocation criteria. The 4% program has been flying under the radar of policymakers, housing advocates, and researchers since its inception. Whereas newly constructed 9% units are increasingly sited in lower poverty neighborhoods, 4% investment is made in high-poverty and low-opportunity neighborhoods. This paper reveals that states have not actively influenced the locational outcomes of 4% projects credit until recently. Policy levers have a more substantial impact on the outcomes of the 9% program. However, the results indicate that increased competition and strong policy levers have enabled some states to influence the siting outcomes of 4% projects. As states have significant power over tax credit allocations and additional financing required to enable the 4% credit, they could consider explicitly using this credit to further fair housing goals and help low-income households reach opportunities. However, careful consideration is needed to balance these goals with neighborhood revitalization.

Keywords:

• Tax credit
• neighborhoods
• opportunity
• low-income housing
• affordable housing

Acknowledgments

I thank UCLA Ziman Center and UCLA Graduate Division/Luskin School of Public Affairs for funding this project. I also thank Michael Lens, Paavo Monkkonen, Evelyn Blumenberg and Edward Kung for their insightful feedback. All errors or omissions are my own.

Disclosure Statement

The author reports there are no competing interests to declare.

Disclaimer

Yiwen Kuai’s contributions to this article occurred prior to his position at Fannie Mae. The views expressed are those of the author and not those of Fannie Mae or the Federal Housing Finance Agency.

Notes

1 Tabulation from the U.S. Department of Housing and Urban Development’s LIHTC Database (U.S. Department of Housing and Urban Development, 2019) with allocations between 1986 and 2016.

2 Tabulation from the LIHTC Database with projects placed in service before 2016. The LIHTC Database has incomplete coverage on credit type.

3 Each state receives an annual allocation, called a “volume cap,” to issue private activity bonds that are exempted from federal (and often state) income tax (Keightley, 2017). Although competing with other civil uses, rental housing generally enjoys a high priority (Cooper, 2010). Tabulation is from HUD’s LIHTC Database (U.S. Department of Housing & Urban Development, 2019) with allocations between 1986 and 2016. Data coverage decreases in more recent years as this is a placed-in-service data set with time lags in reporting.

4 The federal statute gives preference to projects which are located in QCTs and contribute to a concerted community revitalization plan. The Internal Revenue Service has not officially defined a “concerted community revitalization plan.” In 2017, the Internal Revenue Service requested public input on defining the term. See Technical Appendix TA for state definitions.

5 A QCT is a census tract in which at least 50% of households have an income less than 60% of the area median gross income as defined by HUD.

6 IRC §42(d)(5)(B)(v) (Housing & Economic Recovery Act, 2008).

7 State locational prioritizations toward QCTs and DDAs have remained more or less the same between 2002 and 2010 (Ellen et al., 2015). States still use some combination of locational criteria in determining “basis boost” eligibility (Ellen et al., 2015).

8 For a literature review, see Chetty, Hendren, and Katz (2016); Ellen and Turner (1997); Lens (2014); McClure (2010); Sanbonmatsu et al. (2011).

9 See Appendix A for a list of tax credit allocation authorities by state.

10 The analysis excludes all suballocating agencies in Minnesota, New York, and Illinois. For bond allocations, this study focuses on state-level bond regulators. The Affordable Housing Resource Center can be accessed at https://www.novoco.com/resource-centers/affordable-housing-tax-credits.

11 Definitions of “opportunity” vary by state and are documented in Technical Appendix TA.

12 A proposal may face backlash from residents and officials. Residents and community leaders in lower poverty neighborhoods are more likely to successfully oppose developments (Khadduri, 2013). Prior research also finds strong opposition in affluent and “socially homogeneous” areas with a high concentration of owner-occupied single-family homes (Davison et al., 2016; Galster et al., 2003; Scally & Tighe, 2015). Residents often fear affordable housing may reduce the value of their property (Ellen et al., 2007; Nguyen, 2005).

13 States can also give a basis boost to non-QCT projects to make them financially feasible. States often use locational criteria in determining such eligibility (Ellen et al., 2015). These criteria are summarized in the “Research Objective and Methodology” section.

14 See Appendix C for priority changes from 2005 to 2016. See Technical Appendix TB1-6 for policies in 2005 and 2016.

15 See Appendix B for the number of projects by state. Maryland had combined allocations in 2017 and 2018. Rhode Island did not have a 2018 bond cap in early 2019. Maine and Mississippi did not respond to public records requests.

16 American Community Survey 2005–2009 estimates are weighted into 2010 tracts using a crosswalk from Brown University. The crosswalk file can be accessed at https://s4.ad.brown.edu/projects/diversity/Researcher/LTBDDload/DataList.aspx.

17 A project can revise and resubmit its application if it fails to receive funding in one funding round. During 2021, there were 304 new construction applications from 232 projects in three rounds in California. Four projects received tax-exempt bonds from the California Debt Limit Allocation but were pending for the California Tax Credit Allocation Committee. Application and award lists can be accessed at https://www.treasurer.ca.gov/ctcac/2021/application.asp.

18 Due to limited space, detailed descriptions of state policies by category are presented in an appendix rather than the main text. Please see Technical Appendix TB1-6.

19 See Technical Appendix TA for definitions.

20 Results are presented in Appendix E. Appendix D lists the summary statistics.

21 The list of states is based on the calculations by Hudson Timber and Novogradac (Lawrence & Schwartz, 2021; Novogradac, 2019). Oversubscribed states are marked in Table 1. The year 2019 is the earliest to describe multifamily tax-exempt bond cap usage by state. Due to data limitations, this sample aggregates all 4% projects regardless of tax-exempt bonds received. HUD LIHTC database and states do not consistently and accurately report wether a project recevies tax-exempt bond.

Additional information

Funding

This work was supported by the UCLA Ziman Center’s Howard and Irene Levine Program in Housing and Social Responsibility and UCLA Graduate Division.

Notes on contributors

Yiwen Kuai

Yiwen Kuai, PhD, is a research economist at Fannie Mae and a research affiliate at the University of California, Los Angeles.