The low-income housing tax credit (LIHTC) program is the federal government’s primary policy tool for the development of affordable rental housing.  It was created by the Tax Reform Act of 1986 (P.L. 99-514). Within the program, tax credits are awarded to developers to offset the cost of constructing rental housing in exchange for agreeing to reserve a fraction of rent-restricted units for lower income households. Though a federal tax incentive, the program is primarily administered by state housing finance agencies (HFAs) that award tax credits to developers. Developers may claim the tax credits in equal amounts over 10 years once a property is “placed in service,” which means it is completed and available to be rented. Due to the need for upfront financing to complete construction, developers typically sell the 10-year stream of tax credits to outside investors (e.g., corporations, financial institutions) in exchange for equity financing. The equity that is raised reduces the amount of debt and other funding that would otherwise be required. With lower financing costs, it becomes financially feasible for tax credit properties to charge lower rents, and thus, potentially expand the supply of affordable rental housing. The LIHTC program is estimated to cost the government an average of $10.9 billion annually.

There are two types of LIHTCs available to developers. The so-called 9% credit is generally reserved for new construction and is intended to deliver up to a 70% subsidy. The so-called 4% credit is typically used for rehabilitation projects utilizing at least 50% in federally tax-exempt bond financing and is designed to deliver up to a 30% subsidy. This report will also refer to the 4% credit as the “rehabilitation tax credit” and the 9% credit as the “new construction tax credit”
to facilitate the discussion.