Republican bailout for blue cities? The Low-Income Housing Tax Credit trap, explained
Consider the staggering costs: The average unit covered by this credit costs taxpayers $450,000; in California, it routinely exceeds $1 million per unit. Yet because credit funds are largely allocated to the states based on population, the program attracts bipartisan support.
This subsidy is unnecessary for two key reasons. First, in most markets, the private sector already provides affordable housing without taxpayer help. Yardi Matrix data show that in roughly three-quarters of 164 markets studied, market-rate multifamily rents are highly or moderately competitive with so-called affordable, subsidized rents. This proves that the market alone can meet housing needs, when it is allowed to function.
Second, where affordability truly lags, the culprit isn't a market failure but a policy failure. The worst affordability crises are in markets in the usual uber-regulated blue states: California, Massachusetts, New York, New Jersey, Rhode Island, Maine and Pennsylvania. In these places, restrictive zoning and excessive regulations choke new supply, pushing rents out of reach. Tellingly, Democrats run nearly all of these non-competitive markets.
Some claim expanding the Low-Income Housing Tax Credit could produce 200,000 new 'affordable' units annually. That's a fantasy. Credible research shows the credit does little to add net new supply: Nearly half of its projects are rehabs of existing units, which don't increase the housing stock, while many new developments built with the credit simply crowd out unsubsidized private construction.
The Low-Income Housing Tax Credit problems go beyond cost and crowding out. The program's complexity, which runs thousands of pages, enriches lawyers and consultants, not renters. Corruption thrives under minimal federal oversight, as highlighted in a 2023 report from the Government Accountability Office. And a cartel of nonprofits and specialized developers profits handsomely by mastering its bureaucracy, stifling competition and innovation. These issues exemplify the Five Cs that make the credit fundamentally flawed: cost, crowding out, complexity, corruption and cartel.
The root cause of housing unaffordability is a lack of supply, created by local regulations that make land scarce and building prohibitively expensive. No subsidy can fix that. Rather than expanding tax credits and entrenching failed policies, Congress should send a clear message to states and cities by defunding this credit. Doing so would redirect efforts toward fixing zoning, freeing the market, and allowing housing supply to meet demand.
Meaningful reforms by states and localities are straightforward. First, legalize smaller lots in new subdivisions so builders can construct starter homes. Second, allow existing single-family lots to be subdivided for more cost-effective townhomes, duplexes and triplexes. Third, rezone commercial and industrial land for mixed-use residential development. Fourth, keep regulations simple, short, and clear instead of micromanaging the building process.
This approach empowers builders to meet demand, as cities like Houston, Minneapolis, Dallas, Urban Philadelphia, Austin and Seattle show, where deliberate policy choices to allow more construction have kept market rents competitive with subsidized units.
Encouragingly, more states and localities are moving in the right direction. Florida, which is facing severe rental affordability challenges in its southern markets, already passed the Live Local Act in 2023 through the Republican legislature, unleashing new market-rate supply in previously tight markets — proof that local reform, not federal bailouts, is the key. And just last month, Texas passed a series of pro-housing bills, following the lead of California, Montana, Oregon and others.
It's time for policymakers to abandon the myth that subsidies solve housing shortages and provide affordability. The only real solution is more housing, built by a private sector freed from regulatory shackles.
Tobias Peter and Edward Pinto are co-directors of the American Enterprise Institute's Housing Center.
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