Input distortions in the Low-Income Housing Tax Credit: Evidence from building size

• Examines a potential input distortion in project-based housing subsidies
• Subsidized buildings are 25 to 29% larger than unsubsidized buildings.
• Size difference is largest in low-rent locations.
• Effects are driven primarily by additional housing units within buildings.

The Low-Income Housing Tax Credit subsidizes the non-land construction costs of low-income housing units. Because land costs are not subsidized, it may incentivize developers to produce buildings with too much capital from the viewpoint of optimal production. Using data on construction in Los Angeles County between 1993 and 2007, this paper estimates how the Low-Income Housing Tax Credit subsidy affects the size of newly constructed apartment buildings. Holding land area constant, I find the average subsidized building includes 25 to 29% more square footage than unsubsidized buildings constructed in the same year and zip code. The effect is primarily driven by subsidized buildings including more, instead of larger, housing units. Consistent with theoretical predictions, the effects are strongest in locations with low market rent. This input distortion is one reason that housing subsidies that fund the construction of low-income housing may be less cost-effective than subsidies given directly to tenants.