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Wednesday, September 22, 2010

The Low-Income Housing Tax Credit Program: The Fixed Subsidy and Variable Rate

Mark P. Keightley
Analyst in Public Finance

The Low-Income Housing Tax Credit (LIHTC) program was originally designed to provide financing for rehabilitated and newly constructed rental housing with a subsidy equal to 30% and 70% of their construction cost, respectively. To ensure that the 30% or 70% subsidies were achieved, the U.S. Department of the Treasury designed a formula for determining the LIHTC rate. The formula depends in part on current market interest rates that fluctuate over time. These fluctuations have also caused the LIHTC rate to change over time

The Housing and Economic Recovery Act of 2008, P.L. 110-289, temporarily changed the credit rate formula used for new construction. The act effectively places a floor equal to 9% on the new construction tax credit rate. The 9% credit rate floor only applies to new construction placed in service before December 1, 2013. The tax credit rate that is applied to rehabilitation construction remains unaltered by the act.

This report, which will be updated as warranted by legislative changes, explains the original method for determining the LIHTC rate, the relationship between interest rates and the LIHTC rate, and the temporary 9% tax credit rate floor instituted by P.L. 110-289. Historical data on the new construction credit rate is analyzed in order to gain insight into the potential effect of the temporary 9% floor.

Date of Report: September 8, 2010
Number of Pages: 9
Order Number: RS22917
Price: $19.95

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