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Good Tax Incentive to Do Good

By James W. Rouse and F. Barton Harvey III. James W. Rouse is founder-chairman of The Enterprise Foundation in ColumbiaMd. F. Barton Harvey III is chairman and chief executive officer of The Enterprise Foundation. / December 4, 1995



WHILE Congress struggles with ambitious goals for balancing the budget, tough decisions are being made regarding our nation's priorities. Yet, in a move that defies logic, Congress has approved a tax-bill provision that threatens to eliminate the nation's most effective program for engaging private investment in low-income housing development.

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The proposal would rescind the Federal Low Income Tax Credit at the end of 1997. This tax credit is considered a model of successful public-private partnership.

The Congressional Joint Committee on Taxation estimates that the federal housing tax credit represents a tax expenditure of approximately $2.2 billion in fiscal 1995. That amounts to only 3 percent of all federal tax expenditures for housing. Conversely, deductions for homeowners, which are untouched in the tax bill, account for 95 percent of all housing- related tax expenditures.

Low-income housing tax credits provide a strong incentive for corporate America to participate in the renewal of our nation's impoverished urban and rural communities. In exchange for financing the acquisition, rehabilitation, and reconstruction of desperately needed low-income rental housing, corporate investors get a credit deducted from their federal income tax bill.

The housing tax credit, enacted in 1986 and made permanent by Congress in 1993, has helped produce about 800,000 units of rental housing for more than 2.4 million low-income people. LIHTC financing now accounts for about one-fifth of apartments developed in the United States. Almost all of the new apartments are for low-income renters.

The program has generated about $12 billion in private investment. According to the National Association of Homebuilders, it has helped create approximately 90,000 jobs annually, resulting in $2.8 billion in wages and $1.3 billion in tax revenue.

Tax-credit financing allows developers to make lower rents possible for qualified residents. The credit mechanism also ensures that state agencies and private investors - not the federal government - determine where quality housing is most needed.

This program has been particularly effective in supporting the neighborhood-rebuilding efforts of community-based nonprofit organizations. About one-third of all tax credit-financed housing has been built by nonprofit developers. Without the tax credit, there would be virtually no incentive for corporations to invest in these efforts.

As effective as it has been, the tax credit barely allows the nation to maintain a constant (and still deficient) level of decent affordable rental homes. Tax credit-financed homes are developed at a rate of about 100,000 units annually, but nearly as many are lost because of demolition, abandonment, or conversion to higher-income use.

The Republican governors of Illinois, Iowa, Michigan, Minnesota, New York, Pennsylvania, Ohio, and Utah oppose the elimination of the housing tax credit. They are joined by Rep. Rick Lazio (R) of New York, chairman of the House Subcommittee on Housing, who says LIHTC is "an excellent model and a crucial ingredient in providing healthy and affordable housing for our citizens."

If Congress set out today to create an ideal state-administered program for developing affordable rental housing using private and public resources with limited federal bureaucracy, it would probably wind up with something that looks like the Low-Income Housing Tax Credit program.