EP#104 Michael Novogradac | LIHTC Is Under Fire. Is It Still Needed?
On the 40th anniversary of the Low-Income Housing Tax Credit (LIHTC), host Jay Parsons and tax policy expert Michael Novogradac discuss the program's remarkable success in financing 4 million affordable housing units while addressing recent criticisms from both libertarian and progressive critics. They examine claims that LIHTC is wasteful, that affordable rents are too high, and that market-rate rents now compete with subsidized housing, providing data-driven responses to these critiques.
Summary
The episode celebrates LIHTC's 40-year history as the most successful federal affordable housing program in U.S. history, created in 1986 as a temporary three-year program and made permanent in 1993. Parsons explains how LIHTC functions as a public-private partnership: developers receive tax credits for affordable housing that they sell to investors (typically banks) for upfront equity, reducing the debt burden and enabling lower rents while ensuring affordability for 30 years.
The discussion addresses multiple contemporary criticisms. Conservative critics like the Wall Street Journal claim LIHTC is a wasteful subsidy that has failed to stimulate construction while driving up costs. Parsons counters that spiraling construction costs result from city mandates (prevailing wages, extra amenities, environmental requirements) rather than the LIHTC program itself, and notes that projects generally wouldn't be built without tax credits. Progressive critics argue LIHTC benefits large financial institutions and that rents are not affordable enough, particularly for households below 30% AMI. Additionally, some journalists claim that in high-supply markets, LIHTC rents now compete with market-rate rents, suggesting the program is less necessary.
Novogradac provides crucial data to refute these claims. HUD 2023 data shows that 85% of LIHTC residents earn below 50% AMI, and 57% earn below 30% AMI—the extremely low-income category—contradicting claims that the program doesn't serve poor households. He explains that 60% AMI is the maximum allowable rent under tax code, but many states award credits requiring lower rents (45% of 2024 awards were 50% or less; 19% were 30% or less). Most importantly, actual rents are often substantially below maximum allowable levels because properties must compete for tenants in market conditions. When market rents fall, LIHTC rents fall too—they are not fixed at 60% AMI.
Novogradac also clarifies that LIHTC is designed to subsidize capital costs, not operating costs. By reducing debt burden, it allows properties to operate at lower NOI (net operating income), enabling lower rents. For extremely low-income residents, additional subsidies like vouchers are necessary to cover the gap between rent ability and operating expenses.
On future trends, both speakers agree that as construction supply recedes (starts and completions are down significantly), market rents will rebound, and the LIHTC advantage will become more valuable again. They view current competition between LIHTC and market rents as a temporary positive byproduct of high supply that benefits lower-income renters.
The One Big Beautiful Bill Act (signed by Trump in 2024) enhanced LIHTC by making the 9% credit permanent and lowering financing-by tests for 4% credits, allowing states to finance twice as many developments with the same allocation. Novogradac provides California data: 2023-2024 averaged 15,000-17,000 units annually, but 2025-2026 are projected to reach 26,000 and 32,000 units respectively due to the law. However, increased supply has softened equity pricing by 3-4%, making some projects infeasible.
A critical emerging issue is the expiration of LIHTC properties (many hitting the 30-year mark) that require capital improvements and face deferred maintenance backlogs. Parsons worries policymakers will prioritize rent preservation over building maintenance. Novogradac notes that lower financing-by tests now make acquisition-rehab deals more competitive for resources, addressing some preservation needs, but additional mechanisms like the proposed HOPE Act are needed to incentivize individual investors in renovation without competing with LIHTC's equity market.
About this episode
<p>The Low Income Housing Tax Credit (LIHTC) is turning 40 years old this month, and despite financing 4 million units of affordable housing — creating far more low-income housing than any other program — LIHTC is taking heat from all sides these days. You've probably heard many of the criticisms: "It's a developer giveaway and a financial boondoggle! It's not truly affordable to low-income households! LIHTC rents are comparable to market-rate rents and therefore the subsidies aren't needed!" So, what's the truth? What's the data tell us? Rental housing economist Jay Parsons rolls back the tape on how and why LIHTC was created back in October 1986, explains (at a very high level) LIHTC's unique public/private partnership model, and addresses the growing chorus of criticisms. In particular, Jay makes the point that LIHTC is working as intended, primarily housing very low-income households earning at or below 30% of the area median income. Jay also discusses why it's fair to criticize and reform many of LIHTC's administrative processes (which are often anything but efficient) while still acknowledging the program's remarkable outcomes in creating affordable housing. Later in the program, Jay welcomes in the leading guru of all things LIHTC: Michael Novogradac, who has been involved with LIHTC tax policy since Day 1 back in 1986 and continues to be a guiding voice in D.C. and across the country. Mike shares his take on how LIHTC is working relative to its original goals 40 years ago, and addresses the range of criticisms targeting the program. Mike shares data and insights that can be helpful for pro-housing voices hoping to respond to LIHTC critics with thoughtful, data-backed commentary. Also in this episode: Jay breaks down the latest headlines impacting apartments and SFR, including rising multifamily delinquency rates at Fannie Mae and Freddie Mac. And Jay also shares his hot take on why there's no such thing as "Class B/C" apartments, and why it's increasingly important to separate B's from C's.</p>
Key Insights
- LIHTC has financed over 4 million housing units in 40 years, far more than any other federal affordable housing program in U.S. history.
- LIHTC was originally enacted as a three-year demonstration program in 1986 but was made permanent in 1993, demonstrating unusual longevity for federal housing programs (compared to an average seven-year lifespan for most federal housing programs).
- LIHTC does not require annual congressional appropriations because it functions as a permanent part of the tax code; future Congresses must actively repeal it rather than simply failing to reauthorize it, making it more secure than programs dependent on annual appropriations.
- According to HUD 2023 data, 57% of LIHTC residents earn at or below 30% AMI (extremely low income), contradicting claims that the program primarily serves moderate-income households—the majority of beneficiaries are very low-income.
- The 60% AMI maximum allowable rent is a ceiling, not the actual rent charged; states awarded 45% of 2024 LIHTC credits to projects committing to 50% AMI or less, and 19% to projects at 30% AMI or less, with many properties charging below these committed levels.
- Spiraling construction costs for LIHTC properties result from city-imposed mandates (prevailing wage requirements, extra amenities, environmental requirements) rather than the LIHTC program design itself, and developers generally state that projects would not be built without tax credits despite high per-unit costs.
- Market-rate rents competing with LIHTC rents in high-supply markets is a temporary phenomenon; as construction supply declines (starts are down significantly), market rents will rebound and the rent advantage of LIHTC will become more pronounced again.
- LIHTC prices have softened 3-4% on average following the One Big Beautiful Bill Act's enhancements, which expanded the 9% credit and lowered financing-by tests, making some projects infeasible while enabling significantly more affordable housing overall.
- The One Big Beautiful Bill Act is projected to increase LIHTC-financed housing in California from 15,000-17,000 units annually (2023-2024) to 26,000 units in 2025 and 32,000 units in 2026, representing substantial production increases.
- LIHTC is designed to subsidize capital costs by reducing debt burden, allowing properties to operate at lower net operating income and charge lower rents; serving extremely low-income residents requires additional revenue streams like vouchers to bridge the gap between tenant ability to pay and operating expenses.
- The primary emerging threat to affordable housing stock is the expiration of thousands of LIHTC properties reaching their 30-year affordability commitments, many requiring significant capital improvements and deferred maintenance, with unclear political will to fund preservation alongside rent affordability requirements.
- Reporters and critics frequently conflate maximum allowable rents with actual rents charged, creating misleading narratives about LIHTC affordability; actual LIHTC rents respond to market conditions and fall when market rents fall, even though maximum allowable levels remain constant.
Topics
Transcript
Welcome, welcome. It's episode number 104 of The Rent Roll, your podcast on all things rental housing, apartments, build-to-rent, and single-family rentals. And today, I want to wish a very happy 40th birthday to the low-income housing tax credit, LIHTC, 40 years. And LIHTC has financed around 4 million apartment units over those last 40 years, far more than any other program in the country. No program has led to as much affordable housing development as the low-income housing tax credit. And yet, you know, not everybody is celebrating. Not everyone's feeling like it's a celebratory mood these days. If you've not noticed, the low-income housing tax credit is taking fire from all sides these days. You know, I see…
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