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Wednesday, February 27, 2013

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

Mark P. Keightley
Specialist 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. Most recently, the American Taxpayer Relief Act of 2012 (P.L. 112-240) extended the 9% floor for credit allocations made before January 1, 2014.

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 extended by P.L. 112- 240. 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: February 12, 2013
Number of Pages: 10
Order Number: RS22917
Price: $29.95

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