Tax Credits

Opportunities to Improve Oversight of the Low-Income Housing Program Gao ID: T-GGD/RCED-97-149 April 23, 1997

The low-income housing tax credit is now the largest federal program used to fund the development and rehabilitation of housing for low-income households. Under this program, states are authorized to allocate federal tax credits as an incentive to the private sector to develop rental housing for low-income households. The tax credits may be taken annually for 10 years by investors in qualified low-income housing projects to offset federal income taxes. If all the credits authorized over a 10-year period were awarded by the states to completed housing projects and used by investors, the annual cost would be more than $3 billion. The related report, GAO/GGD/RCED-97-55, discusses the characteristics of the residents and properties that have benefited from tax credits and assesses the controls the Internal Revenue Service and the states have in place to ensure that (1) state priority housing needs are met; (2) housing project costs, including tax credit costs, are reasonable; and (3) states and project owners comply with program requirements.

GAO noted that: (1) a substantial majority of households served by the program had incomes considered "very low" by the Department of Housing and Urban Development and about three-fourths of all households benefited either directly or indirectly from other types of housing assistance; (2) GAO estimates the average tax credit cost per-unit, in present value terms, to be about $27,300; (3) all the states had developed qualified allocation plans required by the Internal Revenue Code to direct tax credit awards to priority housing needs; (4) although the states met tax code requirements, GAO identified several factors that could affect the housing actually delivered over time; (5) some states reserve discretion for amending or bypassing the allocation process; (6) in addition, many tax credits that were initially allocated may not have been used; (7) further, the long term economic viability of tax credit projects as low-income housing has not been tested; (8) all states had cost control procedures in place that were intended to help ensure the reasonableness of project costs and tax credit awards; (9) however, some projects lacked complete cost and financial data and some key data used in determining the basis for tax credit awards were not independently verified; (10) while states had established compliance monitoring programs consistent with IRS regulations, the regulations did not provide adequate assurance that states perform agreed upon monitoring reviews; and (11) also, the Internal Revenue Service needs additional information to adequately monitor states' tax credit allocations and taxpayer compliance with credit requirements.

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