The Democratic reconciliation bill includes dozens of new and expanded tax credits for businesses and other special interests. Such credits complexify the tax code, reduce growth by distorting resource allocation, and tend to foster fraud and corruption.

The Low‐Income Housing Tax Credit (LIHTC) is a good example. The $11 billion program inflates the costs of apartment construction, may generate more benefits for middlemen than tenants, and fortifies the well‐known corruption nexus between local governments and developers. The LIHTC is so complex that the standard guidebook for it covers 1,654 pages.

The reconciliation bill would expand the LIHTC by $12 billion over the coming decade, which illustrates that program performance bears little relation to budgeting choices in the federal government.

Like many handout programs, the LIHTC is prone to fraud. Tenants claim benefits to which they are not entitled, and the program spawns fraud by developers and contractors who inflate building costs to overclaim tax credits. This $36 million rip off in Florida is a classic example. One assistant U.S. attorney called the LIHTC a “subterranean ATM, and only the developers know the PIN.”

The LIHTC also generates political corruption. The federal government provides state and local governments valuable tax credits, but in limited supply. State and local officials then hand out the credits to favored developers with little federal oversight. The result has been corruption scandals in Los Angeles, Dallas, and other cities, as Vanessa Calder and I discussed in this study.

LIHTC corruption fits a common pattern. Government contracting is highly susceptible because it also involves a fixed amount of valuable benefits disbursed with discretion. And corruption is endemic in regulatory structures that artificially limit the supply of valuable business licenses, as we see with alcohol and marijuana licensing.

In an April New Republic piece, Tracy Jeanne Rosenthal critiques the LIHTC and other affordable housing schemes that rely on developer subsidies:

Yet they’ve largely avoided public scrutiny. They seem to skate by on their imprecision, complexity, and branding—who would reject “affordable” housing?—and have largely avoided public scrutiny.

The central beneficiaries of Affordable Housing policy are not tenants but developers and investors—a dynamic affirmed by the revolving door between policy benefits and real estate lobbying efforts. Indeed, one scholar calculated that tenants capture as little as 24 percent of the total value the government hands off in subsidies.

Rife with kickbacks and fraud, the [affordable housing] programs also bankroll an industry of financial middle men to match investors with government programs.

Rosenthal comes at the issue from the political left, and I probably wouldn’t agree with her on affordable housing policies in general. But her piece reinforces the point that Congress shouldn’t vote for programs simply because of what the lobbyists and supporters are promising. Program details matter.

Congress should slow down and have a proper debate about the LIHTC and other programs in the reconciliation bill with a focus on understanding the costs, distortions, and negative side effects they may create.

Further reading here.