Lawmakers and advocates are eyeing year-end legislation as vehicles to expand a low-income housing construction incentive as opportunities dwindle to address a growing affordability crisis before the next Congress.
Despite bipartisan support for the low-income housing tax credit, or LIHTC, its expansion in a year-end bill may come down to cost and negotiations around bigger partisan priorities, including the child tax credit, and research and development incentives.
Supporters see the year-end tax and appropriations bills as the last, best chance to take action on housing in this Congress and warn there may be fewer opportunities if Republicans retake the House after the November midterms.
House Ways and Means Chairman Richard E. Neal, D-Mass., said he would like to see the program included in a year-end tax extenders package. The LIHTC, unlike many items in the package, isn’t expiring. The issue is whether a temporary increase in the credit, already expired, can be extended or further expanded.
“But for that credit, there's a lot of housing that doesn't get built at a time when the housing crunch is substantial across the country. I think it's a pretty important tax vehicle,” he said in an interview. “It's demonstrated its value time and again.”
The incentive has bipartisan support but is more popular among Democrats than Republicans. Rep. Kevin Brady, R-Texas, the Ways and Means ranking member, said the committee will consider the housing credit for a year-end package, but he has issues with it.
“There’s challenges with the program, I’ve always thought,” he said in an interview. “For me, it doesn’t fall in the highest priority of buckets.”
Amid high demand and lagging supply, housing faces an affordability crisis. Freddie Mac last year estimated the supply of homes is 3.8 million short of the need, and the National Association of Realtors pegs the shortage at 5.5 million homes.
The shortfall drove up both rents and home prices. Rents rose 12 percent nationally in the first quarter of this year from the first quarter of 2021, with prices in some metro areas soaring as much as 20 percent, according to the Joint Center for Housing Studies at Harvard University.
Nearly half of renters in 2020 spent at least 30 percent of income on housing, qualifying as “cost burdened” by Department of Housing and Urban Development standards. About a quarter spent half their income on rent, according to the Harvard center.
Supporters of LIHTC say it could subsidize construction of affordable units, ameliorating the problem.
The tax credit gets allocated to states based on population. States distribute the credits to property developers that often sell them to institutional investors and use the cash to cover part of the construction cost. The institutional investors can claim the tax credit only after a development opens up to residents.
The credit amount is a percentage of the construction costs of a project’s affordable units, usually working out to a subsidy of about either 30 or 70 percent of those costs during the 10-year life span. Units built using the tax credits must remain affordable for at least 30 years.
The program costs about $10.9 billion annually in forgone tax collections, according to a 2022 report from the Congressional Research Service. It has subsidized construction of about 3.4 million affordable housing units since the program started in 1986, according to HUD.
Congress expanded the credit in the fiscal 2018 appropriations omnibus, but that expansion expired at the end of 2021. Supporters are hoping to attach an expansion to legislation before year’s end.
Despite bipartisan support, whether to expand the LIHTC and in what form remains unresolved.
The most straightforward, modest version would reinstate the 12.5 percent increase in value of credits distributed to states that lawmakers approved in 2018. When the increase sunset at the end of last year, state allocations reverted to 2017 levels adjusted for inflation.
States that got about $2.80 per resident in LIHTC credits last year under the expansion get $2.60 per resident this year. Small states saw their allocation go from at least $3.2 million to $3 million.
Peter Lawrence, director of public policy for the tax, accounting and consulting firm Novogradac, estimates the 12.5 percent expansion funded construction of about 28,000 additional units in the four years it was in effect and would subsidize 55,000 additional units if it were extended through 2028.
“This crisis in the rental market predates the pandemic, but it's become worse as a result,” he said. “At a bare minimum, Congress needs not to go backwards in letting this 12.5 percent allocation increase remain expired. But we would urge them to take further steps in advancing proposals that would help finance more apartments across the country.”
Washington Democrats Sen. Maria Cantwell and Rep. Suzan DelBene last year introduced companion bills with bipartisan support that could provide a more ambitious template. The bills would increase supply of affordable housing by 2 million homes over the next decade, according to Cantwell and DelBene. That would compare with 3.4 million units that HUD says have been subsidized since the program began.
The bills would increase the pot of low-income housing tax credits available to states by 50 percent for two years and then permanently reinstate the 12.5 percent expansion. It would also make it easier for developers to qualify and would increase incentives to build affordable housing in underserved areas, including rural and tribal areas.
The bills have 34 co-sponsors in the Senate, including 10 Republicans, and 193 in the House, including 64 Republicans.
Housing advocates are also backing the Cantwell-DelBene legislation.
Sarah Saadian, senior vice president of public policy at the National Low Income Housing Coalition, said those provisions would provide incentives needed to ensure the tax credit funds housing affordable to those at the very bottom of the income spectrum.
“What we see is that the greatest need for housing, the greatest shortage of housing, really comes from the lowest end of the market. And that's because there's a market failure,” Saadian said. “There's just a certain price below which the private sector can't build on its own, or operate on its own, housing that's affordable to these folks. The only way that housing gets built is if there's federal, state or local subsidies that go into it.”
‘A lot of money’
Lawmakers and advocates see cost as the biggest barrier to getting it into a year-end tax package.
Rep. Donald S. Beyer Jr., D-Va., a co-sponsor of the DelBene bill, said he doubts the provisions will end up in a year-end tax extenders bill because of the cost. The Joint Committee on Taxation estimated similar provisions included in an early version of Democrats’ reconciliation package would increase the deficit by $11.7 billion over 10 years.
“I'd be surprised because it costs money, a lot of money. It's a wonderful investment. All the affordable housing people I know say that’s their magic bullet, their panacea. But it is expensive,” Beyer said in an interview. “The dilemma is Republicans say they love the idea of a pay-for, but they don't want to raise any taxes that would become that pay-for.”
Neal said a year-end package sometimes can clear cost hurdles more easily than stand-alone legislation, though there are limits.
“The end-of-the-year session gives you some room in terms of flexibility and a lot of issues where you see how you move things around,” he said. However, the bill would have to “square obviously with revenue.”
David Logan, senior economist for the National Association of Home Builders, said restoring the 12.5 percent expansion is the likeliest version to end up in a year-end package given cost concerns, especially in light of budget cuts mandated by the 2010 pay-as-you-go law that will trigger unless Congress stops them.
“That allocation increase would be the most effective and, in many ways, be the most cost-conscious too, which would make it easier,” Logan said. “God knows when and how they're going to have to deal with the pay-go sequester issue. Every little bit that's tacked onto the extenders spending that's not offset just kind of increases that scorecard balance.”
‘The top three’
Another challenge facing supporters of the tax credit is lawmakers’ competing year-end priorities. That dynamic worked against housing provisions as Democrats winnowed down their climate-focused reconciliation package earlier this year.
“What I've consistently seen is that, maybe housing is in the top 10 list of priorities for a member, but in order to make it into a bill, it needs to be in the top three,” said Saadian, at the National Low Income Housing Coalition. “Even if something has really broad support, not everything's going to make it in, and so we have a lot of work ahead of us.”
Democrats are pushing to restore an expanded child tax credit that expired at the end of last year in exchange for reviving a bigger corporate research and development tax break provided in 2017 popular with both parties.
Senate Banking Chairman Sherrod Brown, D-Ohio, who has made housing a focus during his chairmanship, illustrated the issue. Asked about expanding the low-income housing tax credit in a year-end tax extenders bill, Brown promoted the child tax credit.
“We're looking at a lot of things. We're looking at R&D. We're looking at LIHTC. The most important one we're looking at is the child tax credit because we know it reduced poverty by 40 percent in this country,” Brown said in an interview. “That's my No. 1 priority and will always be until we enact it permanently.”