Federal Bill of the Month – May 2025: H.R. 3540 – Low-Income Housing Tax Credit Elimination

H.R. 3540 – Low-Income Housing Tax Credit Elimination Act

Sponsor: Rep. Glenn Grothman (R-Wis.)

The Low-Income Housing Tax Credit Elimination Act of 2025, introduced by Congressmen Glenn Grothman (R-Wis.), seeks to eliminate the Low-Income Housing Tax Credit (LIHTC).This bill would formally sunset the LIHTC and stop any new tax credits from being issued from the date of enactment. It would not affect existing low-income housing projects that have already received credits.

It is for these reasons, among others, that TPA is proud to make The Low-Income Housing Tax Credit Elimination Act, as introduced by Rep. Glenn Grothman, its bill of the month for May 2025.

Background:

The Low–Income Housing Tax Credit (LIHTC), established in the Tax Reform Act of 1986, provides allocations to state housing agencies based on population. States can then award credits to developers of qualified low-income rental projects. Once awarded a credit, developers sell the credit to private investors in exchange for equity financing, which reduces the amount of debt a developer accumulates.

To qualify and retain credits, projects must meet either the 20/50 rule (at least 20 percent of units reserved for households earning less than 50 percent of area median income (AMI)), or the 40/60 rule (at least 40 percent of units for households earning less than 60 percent of AMI). Rents are capped for those income levels, typically not exceeding 30% percent of a household’s income.

However, while the LIHTC may seem successful on the surface, it comes at a burgeoning cost to taxpayers. Firstly, per-unit costs are often over-inflated, especially in high-cost urban markets, with some projects in New York City and San Francisco exceeding $750,000 per unit. Middlemen, such as syndicators that buy the credits from developers in exchange for equity financing, charge transaction fees, dampening the real impact of the credits. Due to the complicated, multi-layered financing structure of the LIHTC, it is extremely difficult to audit or assess effectiveness across states and markets.

Secondly, and most notably, the LIHTC does not reduce rent for poor households, unless paired with rental assistance programs like Section 8. Returns primarily flow to banks, insurance companies, and other institutional investors in the form of tax breaks, not directly to tenants, and investors receive 10 years of tax credits, even if the property becomes substandard or loses affordability after 15 years.

Finally, the LIHTC system has proven to be ripe for abuse. DOJ and IRS investigations in Dallasand Miami uncovered over $1 million in fraud in those two cases alone.

By sunsetting the program, taxpayers would save $13 billion per year in tax expenditures.