This July, Congress passed, and the President signed, a major reconciliation package that marks a breakthrough for affordable housing production in the U.S. By expanding the federal Low-Income Housing Tax Credit (LIHTC) program, housing experts, SGA included, expect it to unlock the development of hundreds of thousands of new affordable rental homes nationwide.

The legislation boosts federal funding for LIHTC by 12 percent starting in 2026 for two types of tax credits: 1) so-called “9% projects” that applies a (you guessed it) a 9 percent credit to developers for typically new construction or major rehabilitation under a competitive incentive program, and 2) a set of “4% projects” that usually are used for smaller projects like preservation and some new construction. For the latter, the legislation reduces the amount of bond financing the developer needs from 50 percent to 25 percent, making it easier to finance a project and start construction.

LIHTC is an important national affordability project as it is currently an affordability component of about 210,900 active affordable units, or 4% of all U.S. affordable units, according to our analysis of the National Housing Preservation Database. Since its establishment in 1986, experts estimate the program has helped finance over 3.1 million housing units.

We applaud the federal government’s leadership on this, but the program is only one part of a larger federal framework and a state and local government effort to provide affordability. It advances smart growth by encouraging more building, especially in multifamily properties, but local tools are needed to ensure that these developments are in in-demand walkable urban places that provide greater access and opportunity to residents.

Why LIHTC sparks smart housing development

At SGA, we advocate for policies that foster equitable and resilient communities—places where people can live near jobs, transit, and other essential destinations, like schools and grocery stores. LIHTC is a vital tool in advancing these goals, but it does not itself dictate where projects are built, which risks development being pushed to the edges of communities. Here, the program gives states flexibility in how credits are allocated, creating an opportunity to shape housing outcomes that reflect smart growth priorities.

For example, nothing about LIHTC guarantees walkable, mixed-use neighborhoods, housing diversity, and access to jobs and transit—no federal program really does—but it has the potential to support them strongly. This is up to state and local governments to prioritize those outcomes and to leverage LIHTC to incentivize compact development, promote infill reuse, and support transit-accessible housing.

The structure of LIHTC gives state and local governments enough flexibility to align their housing goals with sustainability and equity, especially since these credits are allocated through the states via Qualified Action Plans (QAPs), which states use to allocate the tax credits. (The Congressional Research Service summarizes the specific details of the LIHTC program.) It is plausible for state QAPs to incorporate scoring for energy efficiency, green infrastructure, and access to jobs and services.

States can prioritize projects that support smart growth land-use practices, like promoting infill development, reusing underutilized sites, or developing transit-oriented development (TOD) close to public transit. This type of development could help reduce the costs for households with respect to transportation, as well as reduce their greenhouse gas emissions and expand their access to high-opportunity areas.

Local governments also play a role in maximizing LIHTC’s smart growth. Jurisdictions that streamline permitting, update zoning codes, and reduce regulatory barriers can make it easier and more cost-effective to deliver LIHTC-financed projects. Aligning these local tools with the federal credit helps unlock the kind of housing development that smart growth demands.

LIHTC needs bolstering and leverage

While the LIHTC program has helped to build millions of affordable homes, it cannot address the nation’s affordability crisis alone, especially in markets where it is most acute. Development financing using these tax credits is often complex, requiring multiple layers of capital, often from federal, state, and local sources, to make any one project viable. In high-cost markets, per-unit costs can exceed $1 million, driven not only by land prices and construction costs but also by prevailing wage requirements, layered subsidy structures, and limited site availability. These local market realities make LIHTC a powerful but incomplete tool, underscoring the need for state and local governments to step in with targeted subsidies, policy alignment, and zoning reforms to bridge the gap between what the federal credit can deliver and what communities truly need.

Additionally, the intricacies of LIHTC financing can create barriers for smaller-scale or mission-driven developers who lack the capital reserves or specialized expertise to navigate multiple application cycles. State and local action can remedy this through certain mechanisms like predevelopment funding, technical assistance, or even set-asides under state QAPs. Without such policy action, small-scale developers risk being shut out of the process, narrowing the diversity of actors building affordable housing.

State and local governments can also use their own funding streams, like housing trust funds, infrastructure grants, and property tax abatements, to deepen affordability for households earning below 30 percent of the area median income. This is particularly important because LIHTC projects alone struggle to reach extremely low-income renters without additional deep rental subsidies like Housing Choice Vouchers. By strategically combining LIHTC with these local resources, governments can ensure that projects serve a broader range of residents and meet more urgent community needs.

Finally, regulatory alignment at the local level is critical to maximizing the impact of LIHTC. Jurisdictions that streamline permitting, modernize zoning to allow more multifamily development, and reduce excessive parking or setback requirements can lower total development costs and speed up delivery. When paired with targeted state and local funding, these policy shifts can turn LIHTC from a strong federal incentive into the backbone of a comprehensive housing affordability strategy. Such a strategy would produce more units, reach deeper levels of affordability, and locate homes in the kinds of walkable, connected neighborhoods that advance smart growth goals.

Looking ahead

Taken together, these state and local actions are not just nice add-ons but the difference between LIHTC being a financing tool and LIHTC being a full-fledged housing solution. The federal credit can open the door, but without the subsidies, policies, and regulations that only state and local governments can provide, too many of those doors will remain closed. Nothing restricts Congress from adding such place-based smart growth requirements to the LIHTC program, but for now, that will remain under the purview of the states.

As members of the ACTION Campaign, SGA fought to support these recent federal reforms and will continue to push for improvements that link LIHTC to deeper affordability, greater location efficiency, and stronger climate outcomes. But the federal win is only the starting point. If we want LIHTC to live up to its potential, we must treat it as just one piece of a coordinated affordability strategy that stacks funding streams, clears regulatory hurdles, and directs development toward places where people can thrive. That is how we turn more tax credits into more homes, in more walkable, connected neighborhoods, for the people who need them most.