Sign Up For Novogradac Industry Alert Emails

Housing Credit Improves Lives, Boosts Economy and Saves Government Money

Published by Michael J. Novogradac on Thursday, July 14, 2016 - 12:00AM

As noted in June’s Washington Wire, Sen. Maria Cantwell, D-Wash., introduced legislation that would, among many other things, expand the low-income housing tax credit (LIHTC) by 50 percent to address the tremendous need for affordable rental housing across the country. More than a quarter of all U.S. renters pay more than 50 percent of their income on rent. There are 11.2 million extremely low-income renters competing for only 7.3 million affordable rental homes. And between 2001 and 2013, the United States lost nearly 13 percent of existing affordable rental housing stock to deterioration, obsolescence or conversion to market-rate rental housing or condominiums. These figures make plain how low-income renters would benefit from a substantial LIHTC expansion.

But the results don’t end there; the proposal would also create significant value for the economy. According to the National Association of Home Builders (NAHB), every 1,000 rental homes financed by the LIHTC in the first year:

  • create 1,130 jobs,
  • generate $107 million in local wage and business income, and
  • produce $42 million in tax revenue.

The NAHB economic impact model incorporates the increased federal, state and local tax revenue generated from the following sources:

  • Federal and state income taxes from the initial construction and ongoing operation of the property,
  • Payroll taxes associated with the construction and ongoing operation,
  • Excise taxes and customs duties generated from building materials,
  • Permit, hookup, impact and other similar development fees,
  • Sales taxes generated by development, and
  • Other business taxes and license fees.

Some critics of the NAHB’s economic model argue that if the LIHTC were no longer in the tax code, the investment toward LIHTC development would be redirected to another economically productive use. However, LIHTC development is labor intensive (according to the NAHB, roughly 60 percent of the development costs are labor-related), employing workers in U.S. communities where the LIHTC development is constructed or rehabilitated. In turn, those workers likely spend a significant portion of their income in those communities. As such, the LIHTC is better for promoting economic growth in the U.S. than other investments.

Furthermore, because LIHTC properties are immobile assets, LIHTC investments stay in the communities where they are developed and are key tools for place-based economic growth. Indeed, a recent working paper from the National Bureau of Economic Research found that each LIHTC development in low-income areas causes aggregate benefits in those neighborhoods of $116 million, increasing surrounding home prices by 6.5 percent and lowering crime rates. Such increased property values generate increased property taxes for local governments and assets for families living near LIHTC developments.

These impacts suggest that if LIHTC expansion is considered on a dynamic basis, as Congress has directed the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO) to do for legislation with a major budget impact, it would have a much lower cost than if the expansion is evaluated in traditional static basis.

Moreover, in addition to providing much-needed affordable rental homes and giving the economy a boost, recent research suggests yet another positive benefit of LIHTC development is government savings.

Notable landmark research by Dennis Culhane, a professor with the University of Pennsylvania’s School of Social Policy & Practice, investigated government costs associated with chronic homelessness. His 2002 study found that in 1999, a mentally ill homeless person in New York City cost the federal, state and city governments $40,449 per person per year, and placing that person in supportive housing with services reduced that annual cost by $16,282 per home. Much other research has confirmed Culhane’s landmark study, including the Economic Roundtable’s study of high utilizers of public and health care services in Los Angeles from 2011 to 2013. The study found that placing homeless patients in supportive housing reduced annual costs per person from $63,808 when homeless to $16,913 when housed. Taking into account costs for housing subsidies and supportive services, every $1 in subsidies spent to house and support those patients was estimated to reduce costs by $2 in the first year and $6 in subsequent years.

The Center for Outcomes Research and Education (CORE), in partnership with Enterprise Community Partners and the Meyer Memorial Trust, expanded the scope of Culhane and Economic Roundtable to find in a study released earlier this year that moving low-income people into various types of affordable housing lowers Medicaid expenditures by an average of 12 percent, ranging from a reduction of 8 percent in family housing to 16 percent for housing for seniors or people with disabilities. For the 1,625 people in the study cohort, annual Medicaid savings was almost a $1 million, or more than $600 per person per year.

Another study conducted by Metis Associates found that housing assistance combined with supportive services for families at risk of losing their children to the child welfare system produced savings in the emergency shelter and child welfare system that offset almost the entire cost of the services provided.

The findings noted here are just a few examples of the kinds of government savings that result from the creation and preservation of affordable rental housing. As the LIHTC is the primary capital resource for creating all types of affordable rental housing–from permanent supportive housing to family housing–these kinds of savings would help offset the cost of expanding LIHTC.

Other sources of government spending savings include:

  • Lower use of federal and state unemployment insurance,
  • Less dependence on emergency shelter, which is typically more expensive to operate than affordable housing,
  • Less demand for other social work assistance,
  • Reduced criminal justice system (e.g., police, corrections and courts) spending,
  • Lowered educational costs, as homeless and unstably housed children are more expensive to educate,
  • Reduced nutrition assistance spending,
  • Diminished transportation costs, and
  • Lower school dropout rates.

And the potential benefits are not just in the health care or social services systems. A widely heralded study by Raj Chetty, an economics professor at Stanford University, found that children moved to affordable housing located in a lower poverty area when they are younger than 13 have an annual income when they are in their mid-20s that is $3,477–or 31 percent– higher on average relative to a control group. Chetty’s research also found that the likelihood of that child remaining in poverty is reduced by 7 percent, and their likelihood of becoming a single parent is reduced by 15 percent.

And of course, reducing the rent burden on low-income families increases their disposable income, which enables them to purchase more and healthier food, pay for important health expenses, invest in their education, and afford other necessary expenses. Such renter spending also has a valuable economic impact on the communities where they live.

At a time when Harvard University’s Joint Center on Housing Studies has found a record high of 21.3 million cost-burdened renter households, including 11.4 million severely cost-burdened households, an LIHTC expansion could help reduce rent burdens for low-income families nationwide.

Novogradac & Company LLP continues to investigate the potential savings on government spending that would result from a substantial expansion of the LIHTC. Have we missed a source?  Please let us know.


Learn more about Novogradac's expertise and many services