CBO Again Suggests LIHTC Repeal Based on Faulty Evidence, Replacing It with a Renter’s Tax Credit

Published by Michael Novogradac on Wednesday, September 16, 2015 - 12:00am

By most accounts, the low-income housing tax credit (LIHTC) is a success, creating 2.8 million affordable rental homes since 1987, nearly 100,000 jobs annually and more $9 billion in economic income. It is the nation’s most important source of capital for affordable rental housing development, and virtually all affordable rental housing constructed or preserved annually since its creation depends upon the LIHTC.

Of course, as with any large program that has existed for nearly 30 years, there is room for improvement as the market changes and program participants become more sophisticated and efficient. However, in light of the program’s success—both objectively and relative to other housing programs—and in light of the tremendous need for affordable rental housing, it’s particularly disappointing when old, tired recommendations to repeal the LIHTC, or to replace it with an unproven subsidy, are made based on dated and faulty evidence.

In “Federal Housing Assistance for Low-Income Households,” the Congressional Budget Office (CBO) reviews the kinds of low-income housing assistance the government provides, how it has changed over time, who federal housing programs assist and the options that exist for policymakers to change to those programs.

The CBO reports that in 2014 the federal government provided about $50 billion in rental housing assistance through both spending and tax programs. In particular, CBO noted:

  • The Housing Choice Voucher (HCV) Program with $18 billion in 2014 spending
  • Project-Based Rental Assistance (PBRA) with $12 billion in 2014 spending
  • Public Housing with $7 billion in 2014 spending
  • Other low-income spending programs (primarily Community Development Block Grants and HOME) with $8 billion in 2014 spending

LIHTC with $7 billion in 2014 tax expenditures

It is worth pointing out that the CBO also notes $130 billion in other housing-related tax expenditures, such as the mortgage interest deduction, property tax deduction and others, that is not targeted to low-income households.

CBO Discusses Repeal of LIHTC

The CBO briefly reviews several options for policymakers to consider with respect to these programs. One option to change housing policy would be to repeal the LIHTC and replace it with a renter’s tax credit for low-income households. In the report, CBO suggests the new credit could be designed to cost the same as the LIHTC, which would mean it would reduce revenues by $42 billion from 2016 to 2025. It is important to note that the CBO has repeatedly made the suggestion that the LIHTC be repealed in previous reports and sometimes suggested using the savings from repeal to increase HCV funding.

The report suggests other methods of supporting the provision of low-income housing are more effective in economic downturns and thus less susceptible to fluctuations in macroeconomic conditions. CBO cites the challenges faced by the LIHTC market during the 2008 financial crisis that made it more difficult to attract equity investment because many LIHTC investors had substantially reduced or no tax credit appetite, which in turn made it difficult for developers to obtain project financing at a time when low-income housing was in great demand.

CBO also cites research suggesting the LIHTC is a costly program because most of the subsidy is retained by providers rather than passed to tenants in the form of reduced rents. I have noted the flaws of this argument and the related research previously, as it was based on one relatively small rental market and faulty projections of renter incomes and overall rents. Indeed, in recent years, the research’s faulty projections are even more inaccurate than they were when the research was published.

CBO Acknowledges LIHTC Could Offer Advantages

However, the CBO also acknowledges that the LIHTC could offer advantages over vouchers in helping to preserve low-income units, noting that as areas become more desirable, landlords might be less willing to accept vouchers. In addition, by helping to produce and preserve low-income rental housing, the LIHTC can help improve neighborhoods.

CBO Proposes Considering a Renter’s Tax Credit

The report also discusses the strengths and weaknesses of its proposed replacement, a renter’s tax credit, such as the proposal from the Center on Budget and Policy Priorities. CBO suggests that the nonrefundable credit could be transferred to property owners, or a property owner could pass the credit through to a mortgage lender in exchange for reduced mortgage payments, allowing nonprofits, real estate investment trusts, and other entities that don’t pay taxes to participate in the program. However, CBO notes that the administrative costs of a renter’s tax credit would be greater than those of providing housing assistance through vouchers. While eligibility determinations could theoretically be handled by public housing agencies in the same way for both programs, claimants of renter’s tax credit would have more complicated tax filings and the government’s administration of the tax code would be more complicated. This would be especially true if the tax credits were transferred to third parties.

Even though it acknowledges some of the disadvantages of swapping the LIHTC for a renter’s tax credit, the discussion included in the CBO report is deceptively simple, to the point of being misleading. The proposal almost sounds like it would be a tidy 1:1 exchange, particularly because the report contends the cost of the two programs would be equivalent. But, the level of administrative complication alone is enough to ensure that not only would low-income renters lose under the proposal, the government would as well, assuming the renter tax credit operates as it is conceived.

Other Policy Changes Considered

The CBO doesn’t limit its policy options to the LIHTC. With regard to other low-income housing assistance programs, CBO also suggests the following policy options:

  • Reduce HCV funding by:
    • 10 percent ($18 billion over 10 years in savings),
    • Eliminating vouchers for households with more than 30 percent AMI ($20 billion over 10 years in savings), or
    • Repealing HCV program ($118 billion over 10 years in savings);
  • Increase HCV funding to cover:
    • 10 percent more households ($18 billion over 10 years),
    • All households earning no more than 30 percent AMI ($290 billion over 10 years), and
    • All eligible households ($410 billion over 10 years in additional costs);
  • Requiring nonelderly, nondisabled tenants to work would cost $10 billion through increased participation in the Family Self-Sufficiency (FSS) program;
  • Increasing tenant contribution toward rent by 5 percent would provide $22 billion in savings which decreasing the percentage contribution would cost the same amount;
  • Increasing PHAs’ access to private funds by allowing them to pledge a greater percentage of future appropriations to repaying loans;
  • Require consolidation of PHAs, especially smaller ones, and reduce overall PHA administrative funding accordingly;
  • Increase PHA administrative funding to meet formula-determined need ($4 billion over 10 years);
  • Replace project-based rental assistance contracts with HCVs; and
  • Provide more money for the Housing Trust Fund.