Residential segregation in the United States is the physical separation of two or more groups into different neighborhoods, i.e. it generally refers to any kind of sorting based on some criteria of the population (e.g. race, ethnicity, income).

While overt segregation is illegal in the United States, housing patterns show significant and persistent segregation for certain races and income groups. The history of American social and public policies, like Jim Crow laws and Federal Housing Administration’s early redlining policies, set the tone for segregation in housing. Trends in residential segregation are attributed to suburbanization, discrimination, and personal preferences. Residential segregation produces negative socioeconomic outcomes for minority groups. Public policies for housing attempt to promote integration and mitigate these negative effects.

The Low Income Housing Tax Credit (LIHTC) program is currently the country’s most extensive affordable housing program. The program was added to Section 42 of the Internal Revenue Code in 1986 in order to provide private owners with an incentive to create and maintain affordable housing. Along with politicians from both sides of the aisle, developers and many banks and nonprofits embrace it because the tax credit makes creating new affordable housing units financially feasible and less risky. Yet the program, which is the only significant federal subsidy for building affordable housing, could be in jeopardy as lawmakers seek to close tax loopholes and lower tax rates.

Properties built with the tax credit program have the untapped potential to help solve the intractable problems of residential segregation by race, ethnicity, and class.

Each year, the federal government delivers approximately US$8 billion in low-income housing tax credits to housing developers that agree to set aside a certain number of units as rent-controlled affordable housing for qualified tenants. Since it began in 1986, the program has helped create at least 45,905 affordable housing projects with nearly three million units.

Some recent research suggests that the affordable housing properties built with the tax credits help to integrate and revitalize otherwise poverty-stricken neighborhoods.

There is a counterpoint. As there are no geographic restrictions on where affordable housing may go for builders to qualify for the tax credit, and there is no mandate that eligible projects help break up pockets of poverty, its impact inevitably varies.

For more than a decade, researchers have noted that affordable housing properties boosted by this tax credit are disproportionately located in low-income neighborhoods. Perhaps for this reason, an important line of research has sought to understand the tax credit’s impact on the communities surrounding new affordable housing projects. Though findings have varied, several researchers have found positive spillover effects.

Establishing affordable housing in low-income neighborhoods may give surrounding areas a small boost. But doing so exclusively may severely restrict housing options available to low-income tenants, leaving many without opportunities to live in other kinds of places.

Recent findings by New York University sociologist Patrick Sharkey showed that children who live in high-poverty, racially segregated neighborhoods are more likely to be even poorer than their parents when they grow up. This effect takes a toll on the generation of children living there and the next generation.

Given the risks tied to living in overwhelmingly segregated neighborhoods, housing policies should encourage builders to construct affordable housing in more affluent areas.

Though the tax code calls for a larger tax credit for projects located in certain high-poverty census tracts, it lacks geographic restrictions or guidance on where they should go. In other words, the federal tax law is designed to increase the supply of affordable housing without saying where to put it.

Without siting mandates, the tax credit is relatively flexible and could, at least theoretically, help make poverty less concentrated. One possibility is to draw higher-income tenants to low-income neighborhoods through low-income housing tax credit-financed mixed-income housing.

For this reason and others, policymakers should instead look to the program’s potential to aid other housing programs. For instance, the $18 billion-per-year Housing Choice Voucher program is designed to give low-income renters choices about where they will live – including places where poverty is less concentrated than where they currently reside.

This program gives low-income tenants vouchers to help pay their rent. They agree to spend up to 30 percent of their income on rent, state housing authorities pick up the rest of the tab, and the federal government reimburses the states for that expense.

Many landlords won’t accept vouchers, sometimes because they worry that low-income tenants won’t pay their rent. Even the landlords who take vouchers can get skittish over compliance and inspection requirements.

But landlords renting out affordable housing units built through the low-income housing tax credit program aren’t allowed to refuse to lease to tenants merely because they plan to use vouchers. Disproportionately siting projects in poor neighborhoods may limit the tax law’s capacity to make the most out of this federal program.

In contrast, encouraging builders to place affordable housing in more affluent neighborhoods with this tax credit may give low-income renters more housing location options. For parents facing economic hardship, the ability to move to an affluent neighborhood may make it more likely that their kids will grow up to be better off.