By Ben Christopher and Marisa Kendall, CalMatters
California lawmakers are preparing for a historic surge in federal funding for affordable housing construction, a tsunami of subsidy that advocates say could as much as double the number of low-rent units produced by the state over the next decade.
It comes from an unlikely source.
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Buried deep among the cuts to social services in President Donald Trump’s signature spending package, the One Big Beautiful Bill, is an increase in support for the Low-Income Housing Tax Credit that affordable housing advocates have sought for years. Those tax credits are the most important federal funding available for affordable housing, and they’re used in low-income projects throughout California.
Exactly how much difference this boost will make in the Golden State depends on many factors, including tariffs, labor costs, state funding, and more. But experts agree the change could help California build thousands more affordable homes each year.
“It’s a very big deal,” said Matt Schwartz, president and CEO of the affordable housing nonprofit California Housing Partnership. “These provisions are a huge shot in the arm for an affordable housing field that has been suffering under exhausted state resources.”
It’s no wonder those provisions haven’t gotten much public attention. The federal law, which Trump signed on July 4, extends and expands tax cuts that disproportionately benefit the richest and adds trillions to the federal debt while imposing historic spending cuts to Medicaid, other patches of the social safety net and clean energy programs over the next decade. For California’s Democratic leadership and its liberal-leaning electorate, there isn’t much to love and plenty to hate.
“From a California perspective, there have certainly been a lot of concerns with that bill,” said Ray Pearl, executive director of the California Housing Consortium, which advocates for affordable housing development.
But the spending package gives affordable housing boosters something to celebrate, even if many in blue California are reluctant to do so publicly.
Because the expansion to the tax credit program, part of a preexisting bill, was folded into the broader package, “the federal government has given us a green light to double production,” said Pearl.
Last week, the state committee that oversees these credits approved changes to its application process that incentivize developers to take advantage of the new federal policy.
What exactly do tax credits have to do with affordable housing?
Rather than fund public housing construction directly like it used to, the federal government rerouted most of its affordable housing funds through the tax code beginning in the 1980s. These tax credits are issued by states to affordable developers, who then sell them on to deep-pocketed banks, insurance companies and other financial behemoths, trading tax cuts for ownership shares in affordable housing projects.
It’s a financial Rube Goldberg machine, and it’s everywhere. If there’s an apartment project designated for unhoused people or low-income tenants in your neighborhood, chances are tax credits helped get it off the ground.
The credits come in two basic flavors. Both are getting a major boost under the new federal law.
One credit lets its owners write roughly 9% of the cost of construction on a project off their tax bill each year for 10 years. Those 9% credits are doled out by the federal government to the states, who then turn around and award them to developers. There are always more qualifying projects than there are credits to fund them, especially in California. The Trump-backed spending package boosts the total number of these credits by 12% each year indefinitely.
The other type of credit, the 4% credit, doesn’t come with a cap, which means it is technically available to any developer who qualifies. How a developer qualifies is the rub. Historically, an affordable project needs to cover half of its costs with particular tax-exempt bonds — which, like the 9% credits, are in short supply — to make full use of the 4% credits. The federal bill reduces that requirement, so that a project only needs to cover a quarter of its cost with the bonds.
“The bottom line is the federal government is making additional tax credits and bond capacity available,” Pearl said, “which is one of the biggest things you need to produce affordable housing nationwide, and especially in California.”
The state receives more requests for bond financing each year than it can grant, said Marina Wiant, executive director of the California Tax Credit Allocation Committee. Her committee last week voted to change its application to line up with the new federal requirements — reducing the percentage of a new project that must be financed via bonds, and allowing projects already approved to reduce their bond financing. That lower threshold means there will be more bond money to go around, and more projects will get funded, she said.
“There are a lot of projects still in the queue that are waiting for bond financing,” Wiant said. “So this immediate change will have a pretty immediate impact this fall.”
How did this affordable housing boost get into Trump’s spending plan in the first place?
Schwartz’s group and others have been fighting for this tax credit increase for years, garnering bipartisan support along the way, he said. Republican lawmakers tend to view tax credits as a “good kind of subsidy,” he said. Because they are used by corporations, they are more palatable than food stamps and other direct assistance that are viewed as handouts.
Just how much could these new tax credits help? That depends on who you ask.
The changes in policy could fund the construction of an extra 1.22 million affordable rental units nationwide over the next 10 years, according to an estimate by the accounting firm Novogradac. That works out to roughly 20,000 extra units per year in California.
But many things could get in the way. If the cost of building goes up because of tariffs, increased labor costs or interest rate hikes, developers might decide not to use the tax credits. Trump’s spending package also keeps corporate tax rates low, which could reduce the value of the housing tax credits.
And, because housing is so expensive to build in California, most projects can’t rely solely on tax credits — they need other local and state funding, too. But that funding is in short supply. Extra money given out during the COVID-19 pandemic has dried up. A statewide $20 billion affordable housing bond was set to go before voters last year, but it was pulled off the ballot amid fears it would fail.
As a result, Schwartz estimates California will see closer to 10,000 new low-income homes built per year as a result of these extra tax credits, not 20,000.
“I think it’s going to take us a couple of years to ramp up,” he said.
Another potential obstacle: The cuts Trump’s spending package imposes on other areas — including the cuts to Medicaid that are expected to result in 3.4 million Californians losing coverage over the next 10 years — could exacerbate poverty for many people and undermine the benefits of the tax credits.
“It’s a tremendous irony,” Schwartz said, “that (the tax credit increase) was in this incredibly harmful ‘big ugly bill,’ as we call it.”