Funding infrastructure under uncertainty: evidence from tax credit prices

Bree Lang and Pratish Patel ()
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Pratish Patel: California Polytechnic State University

International Tax and Public Finance, 2023, vol. 30, issue 3, No 2, 635-677

Abstract: Abstract Politicians promise infrastructure investment via tax credits by involving outside investors, but uncertainty affects the demand for and price of tax credits. We theoretically model and empirically estimate how macroeconomic and federal tax policy uncertainty separately affect the demand for tax credits using data from the Low-Income Housing Tax Credit program. By exploiting reapplications, our identification strategy is simple: federal tax credit prices depend on changes in federal tax policy uncertainty while state tax credit prices do not. Consistent with the theoretical expectations we derive, investors view tax credits as an insurance vehicle causing tax credit prices to increase in response to higher levels of policy uncertainty. As expected, we also confirm that tax credit prices decrease in response to an increase in macroeconomic uncertainty. Our results shed light on the efficiency of using tax credits to finance low-income housing and other types of public infrastructure.

Keywords: Uncertainty; Infrastructure; Tax credit; Affordable housing (search for similar items in EconPapers)
JEL-codes: G18 G31 H25 H53 H54 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10797-022-09729-x

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