New Paper Finds States Have Little Influence on Locations of 4% LIHTC Properties

A paper published in Housing Policy Debate, A Missed Opportunity? The 4% Low-Income Housing Tax Credit Program,” reveals that states have little control over the location of 4% Low-Income Housing Tax Credit (LIHTC) properties. The author finds that policy levers do not impact the location of 4% tax credit projects, as they do with 9% units. This finding is due largely to the fact that 9% tax credits are more competitive and provide a far greater subsidy than 4% tax credits. However, increasing competition for the 4% review process was shown to make policy levers more effective. The author recommends that states introduce additional threshold requirements and provide more meaningful incentives in order to exert greater influence over the development locations.

The author examines the Qualified Action Plans of all 50 states. These plans outline the guidelines that states use to award federal tax credits and to identify policy levers that encourage desegregation and access to opportunity. The author also evaluates tax-exempt bond regulations at the state level, which are often used to supplement funding for 4% LIHTC projects, and general state housing plans. The paper focuses on two allocation cycles, using the 2005 and 2016 regulations and the corresponding siting outcomes spanning from 2005 to 2007 and 2016 to 2018, respectively. 

The analysis of the Qualified Action Plans revealed that the number of 4% tax credits promoting investment in impoverished neighborhoods increased during this time, from 19 in 2005 to 26 in 2016. However, in recognition that LIHTC projects in these neighborhoods could further concentrate poverty, 14 states gave priority to 4% projects not located in high-poverty areas in 2016, up from five states in 2005. States also incentivized development in neighborhoods with higher opportunity for LIHTC projects, with 23 states having such a priority in 2016 compared to only nine states in 2005. Though states defined high opportunity neighborhoods differently, criteria might include low poverty rates, access to quality schools, and close proximity to job centers.

Despite these policy shifts, the author did not find an effect on the siting of 4% projects between 2006 and 2018. Even though there was greater prioritization of developing 4% projects in higher-opportunity neighborhoods, there was an increase in newly constructed 4% projects in higher-poverty neighborhoods, from 12.4% to 16.8%. However, as the 4% tax credit application process has become more competitive recently, this dynamic has begun to shift. When the demand for tax-exempt bonds for 4% projects exceeded supply in 14 states in 2019, the author found that there was a significant positive relationship between incentives for projects with “access to amenities” and the number of units built in low-poverty areas.

These findings indicate that the allocation plan does not meaningfully affect the location of 4% LIHTC developments in states with non-competitive 4% allocation processes. The author suggests that states create clearer incentives and a more competitive application process for the 4% tax credits to further neighborhood revitalization and fair housing goals.

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