How the U.S. Tax System is Being Used to Help Develop Affordable Housing

A New Working Paper explores the potential behind investable tax credits

July 2, 2008
by Kathryn McGhee

Despite the fact that the Low Income Housing Tax Credit (LIHTC) has created the largest source of available affordable housing in the United States, it has also been subject to skepticism and even some calls for repeal. “Investable Tax Credits: The Case of the Low Income Housing Tax Credit,” a new working paper coauthored by Harvard Kennedy School Assistant Professor Monica Singhal, examines the program costs and benefits, and the potential for extending investable tax credits to other programs.

The authors explain that the program functions as a mix of market and government economics. “The government allocates tax credits to developers of low incoming housing who then sell the credits, often via intermediaries, to investors in exchange for equity financing. Credits are subsequently claimed by investors on their tax returns. As a consequence, the tax beneficiary is an investor rather than the provider or the targeted beneficiary of the subsidized service. We refer to this class of tax credits as ‘investable tax credits,’” they write.

Using the structure of the LIHTC as a springboard, the paper considers how investable tax credits might be applicable to other initiatives. The authors conclude that “investable tax credits provide for political and economic benefits that analogous programs cannot provide. Specifically, the LIHTC may prevent regulatory capture, capitalizes on the institutional capacity of the IRS, and builds a broader political coalition for low-income housing…Extending investable tax credits to other domains promises to provide these benefits in other settings characterized by these concerns.”

Monica Singhal is an assistant professor of public policy at Harvard Kennedy School. She is also a faculty research fellow at the National Bureau of Economic Research (NBER). Her fields of interest include public finance and labor economics. Her current research focuses on behavioral responses to taxation and the determinants of local public spending patterns.

Read the complete Working Paper: http://ksgnotes1.harvard.edu/Research/wpaper.nsf/rwp/RWP08-035

Photograph of Monica Singhal

Monica Singhal, assistant professor of public policy

"The LIHTC may prevent regulatory capture, capitalizes on the institutional capacity of the IRS, and builds a broader political coalition for low-income housing…Extending investable tax credits to other domains promises to provide these benefits in other settings characterized by these concerns," the authors conclude.


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