Federal Reserve Bank of San Francisco

Community Development

Learning from the Low Income Housing Tax Credit: Building a New Social Investment Model

Author(s):

April 2013

Community Development Investment Review

In this issue, Terri Ludwig notes the parallels between the Low Income Housing Tax Credit (LIHTC) and social impact bonds (SIBs). She rightly points to their public-private structure, market-based pricing, and built-in program accountability measures as evidence of commonality. Importantly, however, the forces that led to the creation of the LIHTC program were rooted in a different set of priorities than those currently undergirding SIBs. In fact, “social impact” was a secondary concern of the LIHTC; the primary concern was the subsidy of below-market real estate development through the tax code. As we consider using tools like the LIHTC more broadly, as Ludwig suggests, it is important to reflect on the thought process that led to its creation in the first place, and to take note of areas where investment tax credits could be successfully tuned to social impact outcomes. This article briefly examines the origins of the LIHTC, delves more deeply into the credit’s business model and social impact features, and offers some suggestions about how the credit could be refined to increase its social impact and equity even further.

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