Understanding State LIHTC Allocations
By Nushin Huq
7 min read
The Four Components of States’ Annual Allocation Amounts
Every year, state housing finance agencies are allocated millions of dollars to help fund affordable housing through the Low Income Housing Tax Credit program.
The dollar amount allocated to each state for the nine percent LIHTC ultimately impacts what projects will be awarded those tax credits, so it is useful to understand how the LIHTC allocation process determines allocations for each state.
“The nine percent credits are extremely limited,” says James Tassos, deputy director of tax policy and strategic initiatives at the National Council of State Housing Agencies (NCSHA). “In all states, there’s more of a demand for credit than there is a supply. Knowing how much credit a state must allocate is key to a developer, so they understand the competition that they’re facing within the state to get an allocation.”
Four main components make up each state’s annual allocation amount – the new authority the states receive every year, carry-forward credits, returned credits and the national pool. Some states may also receive disaster credits.
Annual Allocations
The new allocation each state receives annually is based on a formula in the federal tax code – the state’s population multiplied by an indexed amount typically released by the Internal Revenue Service at the end of the year. For sparsely populated states, the IRS also sets a small state minimum. Since 2003, the IRS annually adjusts for inflation, both the small state minimum and the per capita allocation. In 2024, states will receive the greater of $2.90 per capita or $3,360,000 in housing credit authority, the IRS said in Revenue Procedure 2023-34, released in November 2023.
The state allocation limits do not apply to the four percent credits, which are automatically packaged with tax-exempt bond-financed projects. Tax-exempt bonds are subject to a private activity bond (PAB) volume limit. The IRS annually sets a PAB volume cap for each state, and in 2024, the volume cap will be greater than $125 per capita or $378.23 million, the IRS announced in the November revenue procedure.
The other piece of the nine percent credit allocation formula is population data. The United States Census Bureau produces population and housing unit estimate tables on a flow basis, which is based on the level of geography and components of change, says a bureau spokesperson. Population updates for states are revised every December. The following March, the IRS typically issues a notice announcing that calendar year’s population-based component.
Because the methodology used to create the estimates is based on Decennial Census data, population estimates are “reset” every decade. At the beginning of a decade, the bureau starts with a new ‘estimates base’ and builds estimates from the most current census data. Because of the reset, the bureau cautions against comparisons between decades.
The population data is important because not only is it one of two factors used to determine a state’s credit allocation, but state housing agencies also use that number to determine if their credit cap will be based on the allocation formula or the small state minimum.
Over the 30-plus years of the program, there have been a few cases where a state “graduated” from the small state minimum to a population-based component, Tassos says.
Because populations are updated every year, the change in population in each state from year to year isn’t typically too significant.
“The states have a pretty good sense of how much credit they have to allocate,” Tassos says.
Within a decade, population data can also be used to identify population migration trends. In 2022, Texas and California were the only states with a population of over 30 million people, though Texas had the largest increase in population from the year before and California’s population dipped slightly from the previous year. Census information also indicated how much change in population comes from migration (people moving in and out of the state) versus natural changes (births minus deaths).
For example, the southern and western parts of the U.S. saw population growth in 2022. The population growth in the South was mainly attributed to migration, while growth in the West was mainly due to natural growth, the bureau says. The Northeast and Midwest both lost populations mainly due to migration out of those regions.
Carry Forward
In addition to new allocations, states can also carry forward, for one year, any unallocated credits from the previous year. Essentially, there is a two-year window that a state must allocate its new per capita authority, Tassos says.
“Those are two things that the state knows on January 1,” Tassos says. “What’s your new per capita authority and how much do you have unused from last year that you can carry forward?”
Two other components of a state’s credit allocation cap—returned credits and the national pool—are not quantified until later in the year. Returned credits are credits that were allocated to a developer in prior years. When a developer is allocated credit, it has until the end of the second calendar year following the year of allocation to place a building in service. When the deadline is missed, credits are returned to the state.
In some cases, a deal doesn’t move forward, and those credits can be reallocated. In other cases, the developer may return the credits, and get a new allocation so that they have additional time to place a building in service.
“That’s been relatively common recently with some of the delays that we’ve seen over COVID with supply chain disruptions and other things,” Tassos says.
Returned credits can come at any time during the calendar year. States might get some back in January or not until December.
National Pool
The fourth component is the national pool, which consists of credits that are still not allocated after being carried forward one year. Those credits are lost to the national pool.
The pool is typically an extremely small amount because most states have a lot more demand for credit than they have a supply of credit. National Pool credits are typically announced around August or September. They are distributed to qualifying states based on population. To qualify for the national pool, a state must have allocated all its credits in the prior year.
“It’s usually a little more than half of the states that might qualify for the national pool,” Tassos says.
The fifth component is disaster credits, which are allocated occasionally and authorized by Congress following major disasters. The amount of credit qualified states receive is usually done through a formula but varies from one disaster to another.
Typically, Congress looks at the number of counties affected by major disasters within a state and the population of those affected counties. That translates into how much additional credit authority they get in disaster credits.
The tax credits must be for projects in the designated counties, though there isn’t an IRS rule related to this.
“Each time Congress authorizes these, there have been some variances in how they’ve been implemented,” Tassos says.
In 2023, there were no disaster credits. The most recent credits were in a 2021 disaster declaration. Eleven states and Puerto Rico were awarded disaster credits and had two years to allocate those credits.
Forward Allocation
Because demand for credit outmatches the credit available, some state agencies manage demand using forward allocation of credits. For example, by December 2023 several states fully allocated their 2023 credits. Some state housing finance agencies may take applications for future year credit authority even before that calendar year starts. It’s not technically an allocation until 2024.
They will use up some of their credit authority for the following year by taking applications early. From the developer’s perspective, a forward allocation can give them a little additional time to work on a project. For a 2024 allocation, the developer has until the end of 2026 to get a building into service.
Forward allocation can impact demand. At the beginning of the year, a state agency will already know its per capita allocation and any carry forward, but there’s less credit available in the balance.
“The developers are aware of this because they’re the ones putting in the applications, but I think that’s a big factor in gauging the demand that a developer may be facing for credits,” Tassos says.
