Policy Memo: Reducing Low-Income Energy Cost Burdens through the Federal Low-Income Housing Tax Credit (LIHTC) Program

Introduction 

The Low-Income Housing Tax Credit (LIHTC) is a federal program created through the Tax Reform Act of 1986 and run by the Internal Revenue Service (IRS). Since its inception, LIHTC has grown to be the federal government’s largest and most significant program for producing affordable housing (Hurley, 2023). A New York Times study estimated that the LIHTC program was responsible for funding 90% of all affordable housing created in the U.S. (“A Tax Credit Worth Preserving”, 2012). A more recent study calculated that 25% of new apartments built between 2000 and 2019 in U.S. were funded through LIHTC (Axel-Lute, 2023).  

To solve the housing crisis facing American families, creative solutions are needed to reduce household bills. A minimum building energy performance standard should be required for all affordable housing developments funded through the LIHTC program. Mandating a minimum Home Energy Rating System (HERS) index score or Energy Star targets for housing developments receiving LIHTC funding would accomplish two goals: not only would it significantly decrease carbon emissions in this critical industry, but it would also reduce renter utility bills for working families and promote greater housing affordability. 

The Problem 

One of the core factors contributing to housing affordability, or the lack thereof, is residents’ monthly energy bills. Although residents may budget for rent, it is disproportionately high energy costs that contribute to housing insecurity and may even lead to higher eviction rates (Hatch, 2024). Data compiled by the American Council for an Energy-Efficient Economy (ACEEE) indicate that one in four low-income households nationally spend upwards of 15% of their monthly income on utilities alone (Ayala, 2024). Low-income was defined as 200% of Federal Poverty Level (ACEEE, 2018). This is nearly four times the national average for all households (Bell-Pascht, 2024). As energy costs continue to rise, due to increasingly extreme summer and winter temperatures, the financial burden placed on low-income families will continue to grow if interventions are not taken. Introducing energy efficiency measures that improve building and appliance design to conserve electricity would greatly alleviate the monthly costs these householders pay. 

At a macro scale, energy use in residential and commercial buildings are responsible for 40% of U.S. carbon dioxide emissions (National Housing Trust, 2023, pg.4). If aggressive energy benchmarking was mandated and enforced for all new and preserved Low-Income Housing Tax Credit (LIHTC) multifamily housing, the impacts on greenhouse gas emissions would be significant (The Energy Policy Simulator, 2024). 

Policy Recommendations 

The policy strategy to introduce a national energy benchmarking standard for affordable housing is threefold:  

1. Calibrate minimum energy benchmarking standards for Low-Income Housing Tax Credit (LIHTC) developments based on data and best practices. 

LIHTC regulations mandate that each state develops Qualified Allocation Plans (QAPs) to distribute the funds. Each state’s QAP sets the rules and requirements for participating developers and lists how individual developments will be scored and awarded (Hurley, 2023).  

The National Housing Trust’s QAP analysis reveals that at least 23 states or localities incorporate whole-building energy performance standards in their QAPs (2023). However, whether the building performance standards are a requirement, an incentive, or an option for additional points varies greatly across programs (National Housing Trust, 2023, pg.2).  

A national whole-building energy performance target should be introduced for all states as a minimum threshold criterion for receiving LIHTC funds from the federal government. This requirement should be calibrated to match widely used and industry respected benchmarking tools already in place in the most sophisticated state LIHTC programs (National Housing Trust, 2023). Based on the National Housing Trust fund’s analysis of best practices, the following targets should be required for existing programs to meet national benchmarks: 

• New Construction: HERS Index 42-50 OR Average % below Energy Star Target Index 15%-35% (2-4pts) and Use of Energy Star Portfolio Manager (National Housing Trust, 2023, pg. 3). 

• Preservation: HERS Index ≤ 70 or ≥ 30% reduction and Use of Energy Star Portfolio Manager (National Housing Trust, 2023, pg. 3). 

The first bullet point outlines the requirements for new construction built using LIHTC funds, the second point outlines the requirements for older building stock renovated or retrofitted using LIHTC funds. States calibrate the second differently because of the cost difference to retrofit versus build using new energy appliances from the start (National Housing Trust, 2023). 

2. Introduce national benchmarking standards through an amendment to the Internal Revenue Service’s (IRS) Section 42 code.  

Section 42 of the Internal Revenue Service (IRS) sets the overarching guidelines for the Low-Income Housing Tax Credit (LIHTC) program (IRS, 2018). Sustainability is considered in the short list of federal requirements for LIHTC in Section 42 today (IRS, 2018, pg.30). The guidelines require that all state Qualified Allocation Plans (QAP) must include selection criteria on the “the energy efficiency of the project” (IRS, 2018, pg. 30). Unfortunately, the vagueness of this instruction leaves both the level of energy efficiency and prioritization for each state to decide.  

Section 42 of the Internal Revenue Code should be amended to require that all developments meet whole-building energy performance targets in compliance with Home Energy Rating System (HERS) index score or Energy Star targets, like the affordability requirements listed today. 

3. Implement national benchmarking change through the inclusion of the IRS code amendment into a larger tax bill traveling through the House and Senate.  

To implement the building energy performance standard change, the amendment should be included as a section in a larger bipartisan tax bill. For the greatest chance of political success, the amendment should be included in a bill introduced by more conservative law makers, which includes job creation and economic development incentives, particularly in rural areas. These elements will help the bill garner more bipartisan support.  

Once drafted, the larger bill will be presented to the U.S. House Ways and Means Committee for consideration and approval. If approved by Congress, the bill will advance to the U.S. Senate Ways and Means Committee, before reaching the President for final sign-off (Wallace, 2021). If passed at the federal level, the requirements would automatically be applied to each state’s respective Qualified Allocation Plan (QAP), reducing state-based variability in sustainability metrics. Once in place, developers applying to receive Low Income Housing Tax Credits (LIHTC) would be required to meet the building energy performance standards in their individual development projects to receive the federal subsidy. 

Conclusion 

The introduction of a national energy benchmarking standard for affordable housing would not only significantly further decarbonization of the nation’s housing stock but also promote housing affordability for working families across the nation by reducing monthly costs. If these policy recommendations were implemented, nearly all new affordable housing created would meet competitive levels of energy efficiency. Ultimately, by designing affordable rental housing to meet energy efficient thresholds, it would alleviate a significant financial burden from the nation’s most vulnerable households and lead to greater housing stability for all. 

 

 

Works Cited: 

“A Tax Credit Worth Preserving.” (2012, Dec 12). The New York Times. Available online: https://www.nytimes.com/2012/12/21/opinion/a-tax-credit-worth-preserving.html?_r=0 

Ayala, R. and A. Dewey. (2024). “Data update: City energy burdens.” ACEEE. Available online: https://www.aceee.org/policy-brief/2024/09/data-update-city-energy-burdens 

Axel-Lute, M. (2023). “The only tool in the box: What it means that LIHTC dominates affordable housing.” Shelterforce. Available online: https://shelterforce.org/2023/12/08/the-only-tool-in-the-box-what-it-means-that-lihtc-dominates-affordable-housing/ 

Bell-Pasht, A. (2024). “Low-income households spend nearly 20% of income on home energy and auto fuel costs.” American Council for an Energy-Efficient Economy (ACEEE) Available online: https://www.aceee.org/blog-post/2024/05/low-income-households-spend-nearly-20-income-home-energy-and-auto-fuel-costs 

“Energy Policy Simulator.” (2022). Energy Innovation. Available online:  https://energypolicy.solutions/home/us/en  

Hatch, M. & M. Graff. (2024). “Housing costs are not a monolith: The association between neighborhood energy burdens and eviction filing rates. Cities,150(104995).https://doi.org/10.1016/j.cities.2024.104995 

Hurley, J. & G. Davis. (2023). “Building a better affordable housing future.” Bluegreen Alliance Foundation. Available online: https://buildingclean.org/sites/default/files/2023-09/%20Building%20a%20Better%20Affordable%20Housing%20Future.pdf  

Internal Revenue Service. (2018). “Internal Revenue Code Section 42: Low-income housing credit.” Novogradac. Available online: https://www.novoco.com/public-media/documents/irc_sec42_051916_0.pdf  

National Housing Trust. (2023). “Whole building energy performance.” Available online: https://nationalhousingtrust.org/sites/default/files/documents/energy-benchmarking-final-formatted-updated.pdf 

“Understanding Energy Affordability.” (2018). ACEEE. Available online:  https://www.aceee.org/sites/default/files/energy-affordability.pdf 

Wallace, D. & P. Lawrence (2021). “Nearly $30 Billion in LIHTC Provisions in House Ways and Means Committee Reconciliation Bill Would Finance More Than 1.38 million Affordable Rental Homes Over 2022-31.” Novogradac. Available online: https://www.novoco.com/notes-from-novogradac/nearly-30-billion-lihtc-provisions-house-ways-and-means-committee-reconciliation-bill-would-finance