The 1986 Housing Credit made private investors fund affordable homes via the tax code

Created by the Tax Reform Act of 1986, the Low-Income Housing Tax Credit (LIHTC) has become the nation's primary tool for producing affordable rental housing. The federal government allocates about $10 billion of credits annually to state and local agencies on a per-capita basis, and the states distribute them to private developers through a competitive process set out in each state's Qualified Allocation Plan.

The mechanism's cleverness is that the subsidy is delivered through the tax code: an investor who buys into an LIHTC project takes $1 off its federal tax bill for every $1 of credit, generally claimed over 10 years, and that expected tax saving becomes equity that lowers what the developer must borrow — which is what makes rents affordable. Properties must meet income and rent restrictions throughout the affordability period.

The scale is unmatched by any other US housing program: since 1986 the credit has financed the development of 4.13 million affordable rental homes, including 3.65 million units across 56,032 projects between 1987 and 2022; households in credit-financed properties have a median income of about $18,600, and roughly 55 percent are extremely low-income.

Credits are scarce and competed for.

Private investors price the credit in a liquid market, so the subsidy's value is set by supply and demand, not by an agency.

States compete projects against each other, so the scarce credits go to the developments that best fit local policy.

Developers and investors share the compliance burden, so the federal government does not manage thousands of projects.

A 10-year claim period matches the affordability requirement, aligning the subsidy with the constraint.

When a subsidy must reach millions of small projects, issue scarce, tradable tax benefits and let private investors value them and developers compete for them instead of building a grant bureaucracy.

LIHTC has generated over 6.8 million jobs and an estimated $773 billion in wages and business income since 1986, and its model has been copied in various forms by other countries. Critics note affordability periods expire — the Rice Kinder Institute flags thousands of units at risk of losing their income restrictions in coming years — and the credit is complex for small developers; proposals to expand or simplify it have circulated in Congress for years.