Key State Roles

Increase and Improve Targeting of Resources

Lack of money is often one of the largest obstacles to the development of new affordable homes. States can help address this shortfall by generating new resources and better allocating existing funds.

Among other strategies, states have generated new funds for affordable homes through housing trust funds, bond issues for affordable homes, and increased use of the 4 percent tax credit. Sometimes, funds are distributed directly to developers by the appropriate state agency. In other cases, the funds are distributed indirectly through allocations to municipalities. (Click here to learn more about the state role in offering incentives to localities and developers.) States also administer awards from the Low-Income Housing Tax Credit program, HUD block grants (HOME and CDBG), and other federal resources (such as Section 8 vouchers).

The state agencies that administer state and federal housing programs often have considerable discretion in determining how to prioritize allocation of program benefits. Low-income housing tax credits, for example, are made available through the Internal Revenue Service but administered at the state level, with projects selected on the basis of whether they meet objectives specified in the state's Qualified Allocation Plan. Similarly, states can distribute their allocation of HOME and CDBG funds among a variety of approved activities as detailed in their HUD-approved Consolidated Plans.

By reviewing their policies for allocating funds within new and existing programs – and across all the programs to ensure they are well-coordinated – states can maximize the utility of these resources and ensure special consideration for activities that address identified housing challenges and shortfalls.

For example, in most states, significant numbers of federally assisted housing developments are reaching the end of their required affordability periods, placing these valuable affordable housing opportunities in jeopardy. To address this issue, 46 states prioritize the preservation of existing affordable homes in their Qualified Allocation Plans for Low-Income Housing Tax Credits, either by setting aside a segment of 9 percent tax credits for preservation or by awarding additional points for preservation-related projects. A smaller number of states have made a major push to use 4 percent tax credits for preservation by reserving multifamily bond cap (under the state's allocation of private activity bond cap) for preservation.

See also:

- With passage of the William E. Sadowski Affordable Housing Act [PDF], the Florida Legislature increased the state's real estate transfer tax and dedicated a portion of the revenue to a new housing trust fund. The fund is administered by the state's housing finance agency, which distributes 69 percent of the revenue to municipalities according to population-based formula and retains the balance to address statewide housing issues.

- In 2002, California voters approved Proposition 46, which authorizes the issue of more than $2 billion in general obligation bonds to fund numerous affordable housing programs. The bulk of the proceeds are allocated to multifamily housing programs, in particular through low-interest loans used to finance construction of new rental homes.

- Through the Illinois Affordable Housing Tax Credit Program, for every dollar that corporations and individuals contribute to approved affordable housing developments or invest in employer-assisted housing programs, they receive a 50-cent tax credit on state income tax liability.

- The 4 percent low-income housing tax credit is an underutilized federal source of funding for affordable housing, available for any qualified rental housing development funded with tax-exempt private-activity bonds. While 4 percent credits generally need to be supplemented with other resources to complete the financing package for affordable homes – one of the principal reasons they are underutilized – states that do not take maximum advantage of 4 percent credits leave millions in federal dollars on the table.

State strategies for expanding utilization of 4 percent tax credits include: (a) specifically reserving a portion of private activity bond cap for multifamily housing, as they do in Arkansas, Kentucky, Maine and New Hampshire; (b) increasing the amount of private activity bond cap allocated to rental housing (this is the only use of bond cap that allows states to claim the 4 percent tax credits); (c) helping to package smaller projects together in a single bond issue, as they do in Ohio, to spread out high origination costs among more properties; and (d) actively soliciting applications for tax-exempt financing that qualifies for the 4 percent credits.

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