At the heart of the LIHTC is the idea of giving investors subsidies for building housing. This concept dates back to the era after World War II. Americans may be familiar with the Servicemen’s Readjustment Act, the “GI Bill,” which set up low-interest mortgages for veterans and other home buyers. It produced broad rings of single-family suburban homes around every city. Much less well-known, however, are a series of incentive programs the government enacted to spur the building of rental housing.
During the late 1940s and early 1950s, the administration of Democrat Harry Truman used a tool called FHA 608 to quickly house veterans returning from World War II and the Korean War. It offered long-term loans and free project-planning assistance to apartment developers and guaranteed them a profit. In many cities, that produced more low-rent units than did the nascent U.S. Public Housing program.
In the 1960s, another Democratic President, Lyndon B. Johnson, pushed a new set of subsidies. Housing was a top concern for Johnson as part of his War on Poverty—leading to his creation of the Department of Housing and Urban Development (HUD) in 1965. His administration used two programs, FHA 221(d)3 and HUD 236, to provide depreciation tax breaks and ultra-low interest loans to private developers of low- and moderate-income apartments. As nationally syndicated financial columnist Sylvia Porter reported excitedly, “There are unparalleled opportunities for profit awaiting you, the investor, in low-cost housing … as a result of the meshing of giant new housing and tax laws.” A savvy investor could use the “big deductions … to offset your other highly taxed income”—a technique called a "tax shelter."
As with the earlier Truman program, these subsidies to private developers “far outdistanced the traditional public housing program” in producing new units, according to the United States Comptroller General Elmer Staats.
During the 1980s, federal housing efforts ran headlong into a rising conservative movement, led by President Ronald Reagan. The right was determined to pare back government spending and slash programs. Congress moved to wipe out most aid to help build affordable housing and replace it with Section 8 vouchers. Instead of subsidizing construction, the government would pay landlords the difference between what a renter could afford and the market rate for rent.