Low Income Housing Tax Credit Needs Reform

Recently I was contacted by a United States Senator's office to talk about housing. Because of the Tenth Amendment, the Federal government doesn't have much control over local housing policy except through subsidies. So my advice to the Senator's staff was to ask more pointed questions about the Low Income Housing Tax Credit (LIHTC). Since 2001 cost burden in the United States has increased from 15 million households to 45 million households; that's 30 million more households paying more than 30% of their gross household income after taxes on housing. That's a 200% increase.

Meanwhile, the LIHTC has increased as an expenditure by about 240% during the same period.

Either LIHTC has no relationship to cost burden measures or it is not helping. I actually make the argument elsewhere that LIHTC is making the housing inflation problem worse. The fact the LIHTC has had no measurable positive effect on housing prices and rents should be enough to pause the program and ask why. But investigative agencies within government have found the program is inefficient and prone to fraud. Yet, nobody in Washington DC or anywhere seems to be concerned about the cash pouring into expensive LIHTC projects. Reform starts with curiosity.

I have posted my doubts that the Low Income Housing Tax Credit would face any real scrutiny or reform in 2024 or ever. However, in December the United States Government Accountability Office (GAO) released a summary of their work trying to get a sense of what is really going on with LIHTC, Low-Income Housing Tax Credit: Opportunities to Improve Oversight. The snapshot provided by the GAO validates what I posted a year ago, Low Income Housing Tax Credit Spending Difficult To Track, Measure. In that post I chronicled my fruitless efforts to figure out where all the money generated by LIHTC was going. Maybe there is some hope in the GAO’s stolid effort to answer some of the questions I asked and maybe that could lead to reforms.

First, a simple explanation of a complicated system of financing using tax credits to fund subsidized housing is almost impossible. But the short version of LIHTC is that the United States Treasury issues an allocation of tax credits to each state based on population. In order to access those tax credits, investors have to put money into the construction of apartments with lower rents. Each state has a Housing Financing Agency (HFA) that develops a plan and distributes the funding. The federal government loses tax revenue and the $13 billion dollars in the latest allocation is considered an expenditure. The LIHTC is the single biggest housing funding mechanism.

The GAO snapshot issued last year highlights studies conducted over several years.

2015 Study

The 2015 study found that “Oversight of HFAs has been minimal, partly because LIHTC is viewed as a peripheral program in IRS in terms of its mission and priorities for resources and staffing. Without such reviews, IRS cannot determine the extent of noncompliance and other issues at HFAs.”

Here, the GAO discovered that once the credits are allocated, there is very little tracking or oversite by the IRS of what happens to them. I’ve stopped calling LIHTC a “program” because it isn’t one. There isn’t an office in Washington DC with a door marked “Low Income Housing Tax Credit Program, Office of the Director.” There simply is no accountability at the federal level, including tracking and auditing of how, where, and when all the tax credit largess is spent. In order to find that out, one would have to make disclosure requests from dozens of state and local agencies. We simply can’t answer basic questions like “How many units were built by private for-profit entities versus private non-profit entities.”

2016 Study

In 2016 the GAO determined that while it “found that allocating agencies generally have processes to meet requirements for allocating credits, reviewing costs, and monitoring projects, some of these practices raised concerns.” Again, this is a $13 billion dollar program and the GAO found that state HFAs “generally” meet the requirements. Let that sink in. Generally. Shouldn’t that answer be “always” and if not, shouldn’t there be oversite and regular reporting of where HFAs are out of compliance?

Instead, the GAO looked at “qualified allocation plans (developed by 58 allocating agencies) that GAO analyzed did not explicitly mention all selection criteria and preferences that Section 42 of the Internal Revenue Code requires” (emphasis mine). What? This is scandalous as I’ve mentioned before. State HFAs are simply out of compliance. Are they worried? Not really, because the IRS really isn’t keeping track of what happens with LIHTC. Remember, Treasury just allocates and pushes out the credits, it isn’t a housing agency. As I pointed out in my post last year, the federal housing agency, the Department of Housing and Urban Development (HUD) has a tracking system with multiple holes in data; it is almost useless to looking at where all the money has gone over the life of the LITHC.

2018 Study

In 2018, the “GAO identified wide variation in development costs and several cost drivers for Low-Income Housing Tax Credit (LIHTC) projects completed in 2011–2015.” Advocates, protectors, and people who profit from billions of LIHTC dollars spilling out into the housing economy hate when I do seventh grade math, dividing total development cost by the number of units in a project. As I’ve mentioned elsewhere, my dumb guy math has even provoked threats of legal action because I was “lying” about the cost of bloated LIHTC housing projects.

But in this look, the GAO discovered that, “across 12 selected allocating agencies, median per-unit costs for new construction projects ranged from about $126,000 (Texas) to about $326,000 (California). Within individual allocating agencies, the variation in per-unit cost between the least and most expensive project ranged from as little as $104,000 per unit (Georgia) to as much as $606,000 per unit (California).”

Why does the cost vary? Why have LIHTC projects reach a $1 million per unit? The GAO posits that because “some allocating agencies require detailed cost certifications from contractors, but many do not,” that “the vulnerability of the LIHTC program to this fraud risk is heightened.” However, I don’t think classic fraud is the problem. The fraud is the ongoing assumption from local elected officials, bureaucrats, and big non-profit developers, that LIHTC will solve the housing “crisis” if it only had more money allocated. The problem with high prices that impact poor people harder is lack of housing, not lack of money. Making it easier to build housing would ameliorate that, and efficient cash subsidies could solve most of the rest of the problem.

The fact that an objective, non-partisan entity like the GAO has discovered big problems with LIHTC is validating to those of us who also find it opaque and inefficient. It’s going to take political leadership at the federal level to begin holding people in the LIHTC system accountable. That won’t be easy because those people are getting wealth and power from the firehose of cash pouring down on them. It’s been almost a decade since the first GAO study here, and they’ve done other work as well. Yet, LIHTC keeps growing. This is why I remain pessimistic about serious reforms to the LIHTC system.

Adapted from a post originally at Forbes.com