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Wednesday, June 6, 2012

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

Mark P. Keightley
Analyst in Economics

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 construction costs, 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. Developers and investors have expressed concern over the uncertainty that the variable LIHTC rate changes introduce into the program.

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 placed 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 31, 2013. The tax credit rate (known as the 4% credit) that is applied to rehabilitation construction remained unaltered by the act. In the 112th Congress, House and Senate versions of the same proposal (H.R. 3661 and S. 1989) would permanently extend the floor on the 9% credit and provide a similar permanent floor for the 4% credit.

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, the temporary 9% tax credit rate floor instituted by P.L. 110-289, and proposed changes in the 112th Congress. Potential alternative policy options are also discussed. Historical data on the credit rates are analyzed in order to gain insight into the potential effect of the LIHTC rate floors.

Date of Report: May 10, 2012
Number of Pages: 12
Order Number: RS22917
Price: $29.95

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