Difficult Development Areas and the Supply of Subsidized Housing

Abstract

The Low-Income Housing Tax Credit (LIHTC) provides a subsidy to developers who construct housing with maximum tenant incomes and contributions towards rent. The designation of a metropolitan area as a Difficult Development Area (DDA) by the U.S. Government increases the generosity of the subsidy that private developers receive under the program, but does not increase the aggregate dollar amount of tax credits available to be allocated. Regression discontinuity methods are used to compare how DDA designation affects the quantity, composition, and location of LIHTC units based on the restriction that no more than 20% of metropolitan areas can receive the designation annually. Results indicate a significant reduction in LIHTC subsidized construction occurs at the 20% population limit, although increases the share of subsidized units located in higher-income neighborhoods.

Keywords: Housing Policy, Tax Credits, LIHTC, Regression Discontinuity

JEL Classification: H23, H42, R31, R38