Issue 8 - Low-Income Housing Tax Credit

Santa Barbara’s housing crisis is undeniable.

Rents are high, homeownership is out of reach for many households, and policymakers frequently call for expanding affordable housing. In Santa Barbara County, rental housing supply is tight, the local rental vacancy rate is estimated around 3–4 percent, indicating very limited availability relative to demand (City of Santa Barbara).  Meanwhile, nearly half of all renters in the county are cost-burdened (spending more than 30% of income on housing) and an additional 25% are severely cost-burdened (spending over 50%) (Noozhawk). This reflects the widespread financial strain among local households.  The largest federal program designed to address this issue is the Low-Income Housing Tax Credit (LIHTC). Since its creation in 1986, the program has financed millions of affordable housing units nationwide. It is widely regarded as the backbone of federal affordable housing policy.

There is, however, an important economic question: is it the most efficient way to provide affordable housing, especially in high-cost markets like Santa Barbara?

Unlike a direct housing subsidy, LIHTC does not involve the federal government writing a check to build housing. Instead, the government allocates tax credits to states, which then award those credits to qualified developers. Developers then sell the credits to private investors, typically corporations with large tax liabilities, in exchange for upfront financing. The investor reduces its federal tax bill, the developer receives equity for construction, and the project is built.

At first glance, this public-private partnership appears elegant. In practice, it introduces layers of intermediation. Investors typically pay less than one dollar per dollar of tax credit, often around $0.85 to $0.95, with part of the difference going to financial intermediaries and transaction costs (Novogradac & Company LLP LIHTC Pricing Survey). Legal fees, consulting costs, and compliance requirements further reduce the share of public support that reaches actual construction. The federal government may forgo one dollar in revenue, but less than one dollar ultimately supports the housing unit itself.

From an economic standpoint, this structure raises a basic efficiency question: Why route housing subsidies through the tax code, financial markets, and intermediaries rather than provide direct funding?

The program is also complex: projects must navigate federal tax law, state allocation plans, and local zoning rules. The timeline from application to completion often stretches several years. Smaller developers without specialized expertise may struggle to compete. Administrative complexity is not merely an inconvenience, it is a cost that affects how many units can ultimately be produced.

Even at full capacity, LIHTC produces roughly 100,000 units per year nationwide. Yet estimates suggest that millions of households nationwide face severe rent burdens, and in high-cost counties like Santa Barbara the share of households facing these pressures is even higher. The credits are allocated largely by state population, not by housing affordability or regional demand. High-cost areas may not receive allocations proportional to their need. In tight housing markets, the total number of tax credits allocated to each state is capped by federal law, limiting how many qualified projects can ultimately receive funding.

Targeting is another challenge. Most LIHTC units serve households earning up to 50 or 60 percent of area median income. Very low-income households, those earning below 30 percent of area median income, often require additional subsidies to afford even these units. As a result, the program frequently must be layered with other assistance, such as project-based subsidies or vouchers, to reach the poorest households.

Because land costs are lower in already lower-income neighborhoods, many projects are built in those areas. While this reduces development costs, it may unintentionally concentrate poverty rather than expand economic mobility. In a geographically constrained region like Santa Barbara, where land near jobs, transit, and coastal amenities is scarce, location matters even more for long-term outcomes.

There is also a cyclical dimension. The program depends on corporations with tax liability to purchase credits. During economic downturns, corporate profits fall, demand for credits weakens, and affordable housing production slows. A social policy objective becomes partially tied to the health of corporate tax markets.

The program costs the federal government roughly $13 billion per year in foregone tax revenue. That figure represents an opportunity cost. Economists naturally ask whether the same resources, deployed differently, through direct construction subsidies or housing vouchers, could produce more units or better target the lowest-income households. Housing vouchers also face practical limitations. Even where laws prohibit discrimination against voucher holders, not all landlords are willing to accept them, which can limit where recipients are able to find housing.

To illustrate the stakes locally, consider just how unaffordable housing has become on the South Coast. Recent local surveys show that the typical rent for a one-bedroom unit approaches $2,890 per month, meaning a worker would need to earn over $55 per hour, or about $115,000 per year just to avoid spending more than 30% of income on rent (Santa Barbara Independent).  Meanwhile, Santa Barbara’s median home value hovers well over $1.7 million.  In this context, even producing one additional unit of deeply affordable housing requires substantial subsidy.

Another dimension is cost. Research on LIHTC development suggests that in high-cost states like California, development costs per unit are substantially higher than in many parts of the country. Analysts have documented that per-unit development costs for one major category of LIHTC-financed new construction in California, known as the “9 percent credit,” increased from roughly $411,000 to $480,000 between 2008 and 2019, significantly above the national average reported in the same period (Tax Policy Center)(Terner Center). More recent analysis suggests that LIHTC development costs nationally have climbed further, nearing $708,000 per unit by 2023, underscoring the rising expense of affordable housing construction (Terner Center). In expensive markets, then, each federal dollar delivered through tax credits buys fewer units than it would elsewhere. This reduces the program’s efficiency in precisely the places where housing shortages and rent burdens are most acute.

None of this means LIHTC has failed. It has produced millions of units and remains the dominant federal affordable housing tool. But the program persists not only because it builds housing–it persists because tax credits are often politically easier to enact than direct spending. This is because it creates strong constituencies among developers and investors, and because the cost appears as foregone revenue rather than an explicit expenditure.

For Santa Barbara, the question is urgent and specific: Are the federal resources flowing through LIHTC being used in a way that reflects the severity of local affordability pressures, or are they diluted by intermediation, cost inefficiencies, and allocation formulas that de-link need from production? In an environment where every public dollar matters, the structure of the subsidy is as important as the intent behind it.