Mark P. Keightley
Analyst in Economics
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
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