The landscape of income-restricted development has changed dramatically over the past half-century. During the era of public housing construction, the federal government directly provided loans and covered debt service for local housing authorities, which in turn maintained ownership in perpetuity. Following the 1973 moratorium on federally funded construction of public housing, however, the responsibility to construct and manage housing for vulnerable populations shifted to a public-private partnership model. The concrete, modernist high-rises of the 1960s have been replaced by sleek four-over-ones, with corporate names like Wells Fargo, JPMorgan, and Bank of America affixed to their construction fence wraps. In light of current affordability and housing supply crises, this archetype is showing cracks.
The Low Income Housing Tax Credit (LIHTC) program was born out of the 1986 Tax Reform Act, a monumental piece of legislation that wholeheartedly embraced the Reagan-era trickle-down theory. LIHTC acts as a lever to incentivize private financing in affordable projects. Credits are allocated by the Internal Revenue Service to state housing authorities, who in turn award them to private companies pursuing affordable projects. These developments must meet state-specific affordability standards determined by area median income (AMI), often with 20 percent of all units in a building being held for tenants at 50 percent AMI, or 40 percent of units available to tenants at 60 percent AMI, with the rest being leased at market rate. Once awarded, the credit is wholly transferable, with developers allowed to sell it to financial institutions in exchange for equity financing. In market-rate real estate, lenders are primarily partners through debt, in which their primary objective is to make money from interest on the loan to the property, and they do not receive any excess profit. Through this direct financing from LIHTC purchase, banks instead become partial owners of these properties, receiving money from the operating income and eventual sale of the building rather than interest. This direct infusion of capital makes the project less reliant on debt, a primary concern in maintaining below-market rates for vulnerable tenants. Investors who receive the credit may apply it to their tax liability at a percentage of the project’s total cost over a span of ten years. Considering the federal government’s full retreat from direct construction of affordable housing, the credit binds the maintenance of low-cost housing stock to the private financing and development markets.
LIHTC has largely been a popular political project since its inception. Because the program was introduced in a bipartisan tax bill, Democrats and Republicans alike stand firm in the belief that the privatization of housing allows for market efficiency to provide a public good. Republicans maintain that the credit system “align[s] incentives toward self-sufficiency, promot[es] upward mobility, and reduc[es] long-term taxpayer burdens.” Despite the credit costing the federal government upwards of $15 billion in 2025, the general consensus that LIHTC expands investment opportunities for banks and other financial institutions without mandating private involvement makes the credit more politically palatable. The belief that competitive distribution, both for developers to obtain it and for banks to purchase it, will optimize the utility of public funds has sustained bipartisan support for the program.
Although the mechanics of the credit have not changed, the housing landscape of 2026 is vastly different than when LIHTC was first introduced in 1986. Renters are cost-burdened at record-high rates; there is an estimated shortage of nearly 6.8 million units of affordable housing, and 82 percent of young adults entering the workforce see homeownership as a loftier goal than previous generations did. Housing affordability remains a salient political issue at all levels of government. The causes of the current housing condition are debated, as are potential solutions. For many, the issue lies squarely on the supply side: To combat skyrocketing housing costs, we simply must encourage construction through incentives like LIHTC. Build, baby, build.
However, LIHTC is simply not equipped to properly manage current localized housing crises. The credit is hyper-complicated, with standard industry guidebooks on its application containing over a thousand pages. Its awarding, distribution, and sale require extensive documentation, often demanding the legal and technical counsel of developers, financial backers, and local housing authorities. Such an administrative burden adds additional transaction costs to every application. Furthermore, the distribution of the credit, both from state authorities to developers and from developers to banks, happens through syndication industries—advisory groups that connect developers and investors and assist in designing the capital stack. The syndication of these credits, in theory to disperse risk among potential institutional investors, eats between 10 to 27 percent of the equity on all LIHTC projects.
This is not to say that oversight, caution, and diversified risk within this system are unnecessary. Public investment to the tune of $15 billion demands some inspection; proper processes to ensure credits are delivered to the right projects makes sense. However, as the credit moves from federal bureau to state agency, then developer, syndicator, community loan distributors, and finally to banks, the many changes of hands required to apply the LIHTC compound administrative burdens and stack transaction costs. These requirements slow any movement toward groundbreaking, a luxury that is simply untenable in the face of urgent housing need.
The program has also been unable to keep pace with the rising costs of construction. Across the pandemic years, construction costs rose dramatically because of labor shortages, supply chain disruptions for critical materials, and the introduction of tariffs. These factors have been exacerbated by high interest rates since 2023. LIHTC-funded projects are largely more expensive to develop than market-rate units. With per-unit costs exceeding $800,000 in cities like Chicago, outlays for these projects are twice as expensive as those for market-rate housing. This discrepancy can be attributed in part to the various state-level requirements for affordable development, including clean energy, size requirements, and robust administrative facilities. However, the layered transaction and syndication costs involved in the complex capital stacks for a LIHTC deal certainly contribute to making ground-up construction a difficult endeavor.
At its heart, LIHTC folds private market investors and developers into the process of affordable construction. The provision of affordable housing for society’s most vulnerable families—which should be a communal responsibility—has become a lucrative asset class. Public money is not just moving into creating public goods; it is also lining the pockets of bank executives and shareholders. While connecting developers with institutions that finance their projects should be a net positive, the industry has ballooned, and opportunities to profit at every step of this outsized process have made the public-private partnership a failure at addressing challenges in housing supply.
What housing policy needs right now is urgency. LIHTC has been the poster child of common-sense housing legislation for decades, representing a bipartisan agreement that market forces are necessary in provisioning public funds. But the industry’s complexity does not encourage expediency—it promotes languidness. The more hands the credit can touch, the greater the opportunity for profit extraction. Federal lawmakers must resist capitulation to the private sector in designing solutions to the current housing crisis. LIHTC is a tool in the belt, but it cannot be a monolith.