«reNtal HousiNg Policy iN tHe uNited states Volume 13, Number 2 • 2011 U.S. Department of Housing and Urban Development | Office of Policy ...»
The Tax Reform Act of 1984 eliminated a number of housing construction programs and, at the same time, introduced the Low-Income Housing Tax Credit (LIHTC) Program. Under the LIHTC Program, a per capita tax credit is allocated to each state to support new construction projects by private developers. The per capita tax credit was increased several times before being indexed to national changes in per capita income. Developers who have been allocated tax credits by the states sell them to private investors and invest the proceeds in building low-income housing projects. In common with the subsidy program for owner-occupied housing, the IRS administers the LIHTC Program—and, of course, neither program is subject to annual congressional appropriations.
To qualify for tax credits under the LIHTC Program, projects must ensure that 20 percent of the new units are occupied by renters earning less than one-half of the AMI or that 40 percent of the new units are occupied by renters earning less than 60 percent of the AMI. Rents in these set-aside units are capped at 30 percent of the HUD-determined income for the area (not 30 percent of the incomes of individual renters). Tax credits may be increased if the chosen neighborhood has a high poverty rate. In practice, LIHTC subsidies are often combined with tax-exempt bond finance, Community Development Block Grant funds, and other public sector subsidies. This arrangement makes it very difficult to understand the cost of the subsidy provided to the qualifying tenants in any LIHTC project. (Note, for example, the complexity encountered by Cummings and DiPasquale  in their comparison of LIHTC projects over time and place.) In the quarter of a century that the LIHTC Program has been in place, about 1.6 million units of subsidized housing have been produced. The program is successful with politicians and builders (and profitable for them as well, if the excess demand for LIHTC projects among builders is any indication). But the GAO report, noted previously, estimates the cost of subsidizing renters by building new LIHTC dwellings is about 16 percent more expensive than using vouchers.
The GAO studies noted previously are not really relevant, because they compare the subsidy costs for newly constructed or rehabilitated units with those for households subsidized by Section 8 vouchers.
As noted previously, building new dwellings to subsidize low-income households is inevitably more expensive than providing equivalent housing using the existing depreciated housing stock.
Thus, if this program and other public programs that construct new or rehabilitated housing for low-income households are to be justified on economic grounds, they must be justified on some other basis. The private benefits to low-income recipients are not worth the considerable cost of these programs.
Depending on the design of these projects, their scale, and their particular locations, however, specific projects may indeed provide substantial economic development benefits for the neighborhoods and cities in which they are located. Under the well-known criteria of welfare analysis, these external benefits can be approximated by the aggregate effect of any project on the property values in the surrounding area. Given the high cost of the housing subsidy in new construction projects relative to those using the existing depreciated capital stock, an external effect on local property values is a necessary condition for undertaking a project, at least using the criterion of economic efficiency.
It is surprising how little attention has been paid to the importance of these externalities ex ante, and even more surprising is how little systematic research has been undertaken on these issues, ex post. Under the LIHTC Program administered independently by the 50 state governments, no requirement exists that the external effects of proposed projects be taken into account at all.
Apparently no explicit mechanism exists for evaluating external effects of the distribution of funds for the rehabilitation of public housing.
In legislation enacted in 2005, however, a statutory preference was accorded to LIHTC projects located in census tracts, “the development of which contributes to a concerted community revitalization plan.” (26 USC 2005 42) As reported by Orfield (2005: 1779), this “preference was never discussed in recorded debates in Congress. No mention of it appears in any legislative debate, any committee report, or in any newspaper report at the time.” Perhaps the enforcement of this provision could be monitored somewhat more closely ex ante by HUD officials and evaluated ex post by the agency.
Analyses of the importance of any external benefits of housing investments have not been prominent in the program evaluation literature, and only a small number of credible studies document the magnitude of external effects for any housing programs. Briggs et al. (1999) investigated the effects of scattered-site public housing on nearby property values in Yonkers; Santiago et al. (2001) used a substantially similar research design to analyze the effects of public housing on property values in Denver. Lee et al. (1999) investigated the effects of several housing assistance programs on nearby property values in Philadelphia, and Ellen et al. (2007) conducted a similar analysis using data from New York City.
Several research papers have analyzed the effects of New York City housing investment policies on neighboring property values (Ellen et al., 2002; Schill et al., 2002; Schwartz et al., 2006).
Apparently, only two studies, by Green et al. (2003) using repeat sales data on housing from Milwaukee, and by Ellen et al. (2009) analyzing micro data from New York, examine the effects of LIHTC projects on nearby property values. The Milwaukee study has never been published.
This work hardly represents an outpouring of research activity, and one cannot help concluding that the incentives for addressing these issues ought to be a lot stronger, especially before expensive subsidized investment decisions are made.
For the housing investment programs under HUD’s immediate control—public housing programs like HOME and HOPE VI—investment decisions ought to consider carefully and weigh heavily the economic development consequences of alternative choices, not merely the housing implications.7 For housing investment programs that the IRS controls—principally the LIHTC Program—the role of other government agencies, such as HUD, is less clear. HUD could provide financial incentives to state tax credit allocation commissions to consider prominently the economic development consequences of their tax credit investment projects. Or HUD could provide technical assistance so that state decisionmakers would be better informed about the potential external effects of specific projects. HUD could also work more closely with the IRS to devise rules that would reward states for considering the broader development implications of their tax credit allocation decisions.
These activities to encourage the more prominent consideration of economic development in housing investment decisions would be consistent with the recommendations and exhortations of the National Research Council’s (2008) analysis of the research capacity of HUD.
Of course, not all housing problems of low-income households can be addressed by transferring resources to poor households, even if those transfers are carefully earmarked to improve housing outcomes. In addition, economic development projects that include new low-income housing are not sufficient either. Low-income households with disabled, elderly, and special needs people may not be well-served by participation in expanded voucher programs. Some fraction of the homeless population is not simply poor. These individuals and households are also disabled. They require housing in a supportive environment that can best be provided collectively by government, or at least supported by public resources and monitored by the public sector. These considerations flow from recognizing that housing subsidies are better considered as part of a welfare system, and not as an infrastructure investment program.
Finally, the vigorous enforcement of equal opportunity in housing is a precondition to the functioning of an expanded market-based voucher system for low-income renters, and continued vigilance in the eradication of those regulations that restrict locations for the construction of rental housing is also necessary.
The Choice Neighborhoods Initiative announced by HUD in July 2009 may be intended to encompass economic development more generally, but at this point it is difficult for outsiders to know. The effect of HUD’s housing investments on neighborhood economic development should be a very important factor in allocating scarce resources.
Acknowledgments The author thanks Ingrid Gould Ellen and two anonymous reviewers for their comments.
Author John M. Quigley is the I. Donald Terner Distinguished Professor at the University of California, Berkeley.
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Additional Reading Ellen, Ingrid Gould, Amy Ellen Schwartz, Ioan Voicu, and Michael H. Schill. 2002. “Does Federally Subsidized Rental Housing Depress Property Values?” Journal of Policy Analysis and Management 26 (2): 267–280.