The housing crisis has worsened and poverty continues to rise in the United States. Two-thirds of poor renters spend at least half of their incomes for housing costs. Meanwhile, the federal government has substantially cut its spending on housing programs as part of deficit reduction efforts. One federal program remains intact, the low-income housing tax credit (LIHTC), which presently provides part of the financing for over 90% of the construction of low-income housing. According to some estimates, the LIHTC accounts for as many as 100,000 units a year. In Delaware, it accounts for approximately 210 units a year.

What are low-income housing tax credits? Instead of directly providing the funds from the federal government, housing is financed through the tax code. The Tax Reform Act of 1986 eliminated certain tax subsidies for housing and also created the LIHTC. Anyone who invests in housing intended to serve households with incomes at and below 60% of the median income for the area can receive this tax credit, which is used to reduce the income tax they owe dollar for dollar. How does this occur? Housing developers, nonprofit and for profit, make applications for an award of tax credits from a state entity. In Delaware, that entity is the Delaware State Housing Authority and the applications with all the pertinent information about the housing are typically due in April. According to an allocation plan that establishes priorities, the applications are ranked and awarded the tax credits. This is an extremely competitive process. Delaware receives a tax credit allocation of approximately $1.9 million a year. Once the tax credits are awarded and all other financing is approved and secured, the developers shop around for an organization such as an equity fund. Such entities purchase the tax credits from the developer and in turn sell them to investors. This process is known as "syndication" and requires a fair amount of legal and marketing expertise. In return, the developers acquire funds to invest in the housing. Typically for every dollar of tax credit, the developer obtains 55 to 70 cents. The investors join the developer in an ownership structure known as a limited partnership. In the end, developers receive the money needed to reduce the financing required, and investors secure tax benefits for 10 years.

Who are these investors? Often, the LIHTC is mainly of value to corporations who want to shelter their profits from federal income taxes, but private individuals can participate as well. Corporations can also treat the housing as an asset that loses its value over time. This "depreciation" is a deductible expense on their taxes. Between the credit and the depreciation, the total savings can be as much as one and a half times the money a corporation invests.

Is there something wrong with this? Is this good or bad governmental policy? Upper-income investors and big corporations avoid paying part of their income tax obligations by making investments in low-income housing. Many say the tax system is lopsided enough without using such devices. Also the money still comes from the federal government; it simply collects less. Secondly, a large amount of money is paid to the middlemen: the lawyers, syndicators, accountants, and others who structure these types of deals. These transaction expenses add extra costs to the price of developing housing. Also, the deals are very complex; many feel needlessly so, and that the transaction costs are wasteful. Another concern often expressed is whether LIHTC produced housing will remain as permanent affordable housing. What happens when the tax credit benefit runs out in 15 years or so? Will the investors want out of the limited partnerships owning this housing? And at that time, will we be risking the displacement of low-income tenants?

On the other hand, many argue that there is nothing wrong with LIHTC and that Congress offsets the lost revenue due to tax credits by raising taxes on high-income individuals and corporations. Furthermore, it is argued that transaction costs occur with any housing program and that direct federal programs add their own extra, often wasteful, costs such as causing significant time delays due to long review periods. Also, any type of low-income housing development will be complex because many resources have to be combined. As to the argument concerning permanent affordability, nonprofit corporations, as general partners in the limited partnership, can establish early on the right to buy the housing from the investors after the tax credit benefit expires in order to keep the housing perpetually affordable. Many states require that the housing serve low income tenants for at least thirty years but what will exactly occur after the tax credit benefit expires in 15 or so years is really unknown.

What is the actual cost of LIHTC to the federal budget? Presently, the tax credit costs $2 billion a year in lost tax revenues. This is quite small when compared to other tax reductions such as the mortgage interest deductions which costs the government $47 billion annually of which 80% of tax benefits goes to the wealthiest 20% of taxpayers.

The fact is that massive resources of all types are necessary to tackle the housing crisis and until the government is willing to drastically increase the direct allocation of federal dollars for housing, it is difficult to build affordable housing today without tax credits.