Association for Public Policy Analysis & Management

In the United States, 36.6% of households rent their home--the highest rate since 1965. Despite an increase in the number of renters who spend 50% or more of their income on housing costs, 40% of all new rental construction has targeted higher-income households compared to 15% of new construction in 2001. Businesses own the majority of large apartment properties and a third of all rental units, which are growing predominantly in gentrifying neighborhoods.

Though the resulting housing instability is most profoundly felt at the local level, it is driven by global financial deregulation and financialization—an economic shift in which profit is increasingly made through monetary manipulation vs the production of goods and services. Private equity firms are not merely developing units to be sold to the highest bidder, but are also targeting the market of low-cost and affordable rental units through the use of the Low-Income Housing Tax Credit (LIHTC). The LIHTC is the leading provider of affordable rental units in the United States. By providing federal income tax credits to private corporations or individual developers who invest in creating, building, and rehabilitating affordable rental housing, it incentivizes private equity investment in the production of affordable rental housing while also requiring that new or rehabilitated units remain affordable for 10-15 years.

Indeed, private equity has pronounced influence among LIHTC beneficiaries; 95% of credits are claimed on corporate income tax returns and only 5% on individual returns. LIHTC-funded units are more likely to be built in gentrifying neighborhoods and are less likely to remain affordable compared to non-gentrifying areas after the affordability requirement expires. This demonstrates that large firms who invest in the LIHTC ultimately prioritize profit over the well-being of tenants, which this paper examines in detail.

The LIHTC is susceptible to changes in tax code and market downturns. LIHTC production and preservation efforts fell 47% between 2004 and 2010 and have yet to return to pre-2004 rates. The Urban Institute and Cato Institute forecast that the recent passage of the 2017 Tax Cuts and Jobs Act (TCJA) may cause another dramatic drop in LIHTC-funded units. By lowering the corporate tax rate from 35% to 21%, the TCJA has decreased corporate financial incentives for making equity investments in the LIHTC program. As has historically been the pattern, without private equity investment, developers will struggle to continue to produce new, affordable units.

When conditions permit, the LIHTC program serves to increase the stock and condition of affordable housing. However, it has been proven that when corporate incentive to invest in LIHTC wanes, both the condition of existing units and availability of new low-income housing units decreases. As a result, policymakers must incentivize development in innovative ways. One way to accomplish this is through amending the new 2018 American Housing and Economic Mobility Act, to include a LIHTC repeal that would increase tax revenue from corporations, reduce tax code complexity, and induce radical thinking: affordable housing solutions should come from tax dollars, not tax credits; affordability must be an intentional government investment.