Introduction and executive summary
Americans are riled up about the cost of housing. For the first time in living memory, housing affordability figured prominently in a presidential campaign — and for good reason. Research shows that housing supply in U.S. metro areas has become progressively less elastic over time. This means that when demand for housing grows — as occurred during the pandemic, when people started working from home and wanted more living space — it causes higher housing prices rather than the development of more housing.
Presidential candidates and members of Congress have floated various ideas for increasing the supply of housing, but to date, none of their proposals have addressed the local political barriers that stand in the way. In big, high-demand cities, a proliferation of interest groups seeks payoffs and in-kind benefits whenever new housing is proposed. Their demands raise the cost of development and privilege politically connected developers over firms that could produce new housing at lower cost.
This white paper suggests a fix for the dysfunctional urban politics of housing: Congress should modify the Low Income Housing Tax Credits (LIHTC) to make projects in big, expensive cities ineligible for LIHTC subsidies unless the city opts into a pro-housing regulatory framework. To retain LIHTC eligibility, big cities would have to accept limits on fees and price controls on new multifamily housing; review housing development proposals “ministerially,” that is, just for compliance with objective standards; and allow reasonably dense housing to be built on commercial corridors. These rules would apply to all housing development in the city, not just to LIHTC-subsidized projects.
The new conditions on LIHTC eligibility would change the urban politics of housing. Affordable housing developers and advocates for poor people would lobby cities to opt in, even as other groups that benefit from the status quo push back. For the typically progressive politicians who serve on big-city councils, it would be tough to say “No thanks” to LIHTC. Council members who voted to turn down the money rather than accept pro-housing policies would be attacked for throwing poor people and affordable housing developers under the bus — an inviting line for challengers in heavily Democratic cities. Though large, expensive cities are overwhelmingly Democratic, our goal is nonpartisan: LIHTC-based housing supply incentives can only influence the political economy of housing supply in a jurisdiction that values access to LIHTC.
The big-city LIHTC conditions we propose are not radical. They draw on recent legislation enacted on a bipartisan basis in states as different as Florida, California, Montana, Colorado, and Massachusetts. And they give effect to the “sense of Congress” expressed in the pending Affordable Housing Credit Improvement Act, which calls on the House and Senate to “develop incentives within the affordable housing credit program to…reform burdensome land use and zoning regulations.”1
Cities that opt into the new regime will become much less supply-constrained. This will benefit not only the city’s current tenants and would-be homeowners, but also people and firms throughout the entire metropolitan region and beyond. In a free society, housing markets are all connected: people who move into a new dwelling usually move out of another, which then becomes available for other people to buy or rent, and so on. Fixing the big-city politics of housing will make housing more affordable for everyone, everywhere.
To be clear, our proposal is offered as a fix for bad housing policy in big cities, not as a comprehensive LIHTC reform. The LIHTC program is notoriously inefficient. It crowds out other investment in multifamily housing.2 Per federal dollar expended, it provides far less value to low-income tenants than does the housing-voucher program.3 There’s a strong argument for jettisoning the LIHTC program in favor of a refundable renter tax credit outside of supply-constrained markets. In constrained markets, however, new subsidies for renters would mainly result in higher rents. To help renters and would-be homeowners in such markets, Congress must address the barriers to supply. Incentivizing big cities to opt into federal prohousing rules is one way to do it, and LIHTC developers are a constituency that can be rallied to the cause.4
Footnotes
- Affordable Housing Credit Improvement Act of 2023, S. 1557, 118th Cong., 1st sess. Introduced May 11, 2023. ↩︎
- Evan Soltas, “Tax Incentives and the Supply of Low-Income Housing,” May 11, 2024, https://evansoltas.com/.https://evansoltas.com/ (finding that LIHTC pulls investment
forward in time but generates little net new housing). ↩︎ - Soltas, supra, finds that about 50% of LIHTC tax expenditures are captured by developers, and that the effective fiscal cost of the LIHTC program is about a million dollars per net new housing unit. Another study estimates that tenants’ consumption of housing and other goods and services increases by less than $0.30 for every $1 in LIHTC expenditures, versus $0.77 for every $1 in spending on the federal housing-voucher program. Edgar O. Olsen and Dirk W. Early, “The Effects of U.S. Low-Income Housing Programs on Recipient Consumption and Wellbeing,” SSRN Scholarly Paper (Rochester, NY: Social Science Research Network, June 22, 2023), https://doi.org/10.2139/
ssrn.4488590. ↩︎ - If LIHTC were replaced with a refundable tax credit, eligibility for the tax credit could also be restricted to renters who reside in places with elastic housing supply or in big cities that have opted into federal prohousing rules. However, we think that unorganized low-income renters would be a less effective force (compared to firms that specialize in LIHTC projects) for lobbying cities to opt in. ↩︎