Tax Incentives and the Supply of Low-Income Housing

By Evan Soltas of MIT.

"Abstract 

This paper studies the impacts and incidence of subsidies for low-income housing development, which are often portrayed as transfers to the developers of inframarginal projects. I estimate a dynamic model of developer behavior using new data on competitions for Low-Income Housing Tax Credits and three sources of policy variation: quasi-random assignment of subsidies, shocks to subsidy generosity, and nonlinearities in scoring rules for subsidy applications. I find that subsidies add few net units to the housing stock and instead pull investment forward in time. Households benefit from modest rent discounts on subsidized units, but developers capture around half of the subsidy in profits, and another quarter is dissipated in their fixed costs of competing for subsidies. Due to lower developer incidence and entry costs, a voucher program could likely generate similar household benefits at less fiscal cost."