The Tax Expenditure Cost of Increasing LIHTC Allocations

Published by Michael Novogradac on Monday, August 4, 2014 - 12:00am

Both the Bipartisan Policy Center (BPC) and President Barack Obama have made proposals that would increase low-income housing tax credit (LIHTC) funding. BPC’s Housing Commission advocates a 50 percent increase in LIHTC allocations. The president has proposed giving states the option of converting private activity bond cap into LIHTCs.

There is little debate that there is a need for more affordable rental housing. However, there is debate about the ability to obtain significant additional funding for affordable rental housing in the current federal fiscal climate.

To help inform the discussion regarding ways to enhance such funding, Novogradac & Company used Census population estimates and Congressional Budget Office (CBO) inflation estimates to model the potential cost of two possible versions of a 50 percent increase in LIHTC allocations.

One version of this proposal would increase LIHTC allocations by 50 percent in the first year of implementation and revert to inflation-based growth thereafter. Novogradac & Company estimates the five-year cost of such boost would be roughly $1.7 billion, while the 10-year cost would be roughly $12.8 billion. Alternatively, a phased-in 50 percent boost of LIHTC allocation would cost roughly $565 million over five years and approximately $9 billion over 10 years according to Novogradac’s model.

By comparison, the Obama administration’s proposal to allow some private activity bonds to be converted to 9 percent LIHTCs would generate a theoretical maximum increase in allocable LIHTCs of about 23 percent, and would cost roughly $288 million in the first five years and $1.55 billion in the first 10 years, according to the Joint Committee on Taxation (JCT). The administration’s own estimates, found in the fiscal year 2015 Greenbook, significantly differ from the JCT’s projections. The Treasury Department estimates the bond conversion proposal would cost roughly $220 million in the first five years and $860 million in the first 10 years. Because it is so difficult to predict the exact utilization of the bond conversion procedure if the proposal was to be adopted, the range of potential cost estimates for the bond conversion is broad.

Estimated Tax Expenditure Effects of Selected LIHTC Proposals, Fiscal Years 2015-2024
Click to Enlarge


While the cost estimates for these proposals are illuminating, it is important to keep in mind that they are only one part of the equation. Determining which policies to support requires a focus on fiscal costs and political realities. To learn more about the potential impact of these policies and other tax reform proposals, read this month’s edition of the Washington Wire.

In light of the recent congressional hearing on dynamic scoring held by Rep. Pat Tiberi, R-Ohio, it is worth noting that the above estimates are static scores, and a dynamic scoring analysis would likely yield a lower five- and 10-year cost.