In 1987, the United States implemented a tax program called Low Income Housing Tax Credit (LIHTC), which is already the largest subsidized rental housing construction program in U.S. history, subsidizing 30 to 91% of construction costs. From 1897 until 2006, LIHTC program has subsidized 1,594,671 units out of a total of 90,456,964,308 allocations in the same period. LIHTC is an expensive program, amounting to almost $21 billion of costs, in the year 2006.
This program is based on a subsidy given to construction of low-income housing in U.S.
However, this program also targets moderate housing construction competing directly with unsubsidized housing construction from the private sector.
In this way, LIHTC projects end up targeting consumers with an income higher to those who really face a traditional housing problem. Because of this, LIHTC causes crowd out effects that emerged once U.S. government started to compete for a market share against the private sector.
Economic-wise, there are three agents affected by the program: Consumers, who receive the subsidy from the program; Government, who conceives the program to the families as consumers, competing with other producers; and Private Sector, regarded as the producers. Even more, there might be a fourth agent that would be the taxpayers.
Firstly, and taking into account the economic model of General Equilibrium, we can clearly see that consumers are the biggest benefited here. Once all high-, moderate-, and low-income consumers end up receiving a subsidy to construct their houses, increasing their income destined to housing construction, even though these are the principal tax payers that make this program possible. Families, private consumers and companies enjoying this benefit will be better off as long as the program is alive.
Although, there is a considerable amount of low-income consumers that do not have conditions to be part of this program. Regardless, they are being the ones that more need it, but simply do not afford to enter the program. Consumers suffering from this situation do not improve their welfare, as the others do by embracing the program.
Secondly, in Government’s perspective, LIHTC program is a considerable loss on tax revenues, because of the heavy costs felt by providing it, as stated in the beginning. On the other hand, the government has been able to decrease the housing shortage, by stimulating housing production and rehabilitation since its beginning. In this way, the government is improving consumers’ welfare providing facilities on access to a very important good.
Finally, producers, namely the private sector, who constructs unsubsidized housing for high and middle income level families, end up being worse off. Mostly, government ends up “stealing” an important percentage of their market share, which resides mainly in the moderate-income consumers. In the end producers’ income decreases, reducing their welfare, being these ones the most affected negatively.
In conclusion, the implementation of the LIHTC program by the U.S. government affects its economy, reducing domestic private production, increasing government costs and improving consumers’ welfare.