This paper is intended to help state officials think about how to make strategic use of the Low Income Housing Tax Credit (LIHTC), which since the late 1980s has been the primary vehicle for building or rehabilitating housing with rents affordable to low income families and individuals. The paper provides a framework for state decision-making, based on research and theory about where and for whom the development of subsidized rental housing is most effective. The paper draws heavily on a literature review and empirical analysis conducted for HUD’s Office of Policy Development and Research in 2003 and early 2004. It presents the implications of findings from a large body of research.

The paper takes no account of "political reality," because every state has its own. Every state could implement some of the approaches that the growing expert literature suggests, and many states are already trying to do so.

After an introductory description of the way in which states make decisions about the LIHTC, the first section of the paper discusses the geographical allocation of the LIHTC resource among metropolitan housing markets within a state, based on different levels of need for: 1) rental housing assistance in general and 2) project-based rental housing assistance in particular. The second section discusses the targeting of LIHTC to housing developments designed for occupancy by different types of households: the poorest households, large families, the frail elderly, and people with disabilities. The third section relates to the use of LIHTC developments as part of a strategy for individual metropolitan areas within the state. It discusses the potential roles of LIHTC developments in enabling low-income families to live in high quality neighborhoods and in revitalizing neighborhoods that are fragile or distressed.