State funding sources
Last updated on: April 3, 2026
This page provides an overview of the role states play in funding affordable housing. While cities, towns, and counties have an important role in the affordable housing funding process, states have the power to establish their own funding streams and administer funds for several federal housing programs.
States play an important role in affordable housing funding. First, they administer federal housing funds. State housing finance agencies (HFAs) allocate federal tax credits for low-income housing projects and sell bonds to finance affordable housing development and low-cost mortgages for lower-income homeowners. State agencies also play a role in distributing U.S. Department of Housing and Urban Development (HUD) block grants. Second, states are increasingly establishing their own revenue streams for affordable housing activities. While some states, such as Louisiana, South Dakota, and Wyoming, still largely limit their role to administering federal passthrough funds and tax-exempt bonds, many states have diversified over the last decade, creating state-funded housing trust funds, revolving funds, and grant programs to support the development and preservation of affordable housing.
Although housing-related expenditures are rarely among any state’s largest budget items, states across the nation independently allocated over $2.43 billion to support the development of affordable housing in fiscal year 2025. This excludes additional investments states made into rental and mortgage assistance. The three largest allocations in that budget cycle were made by New York, Florida, and Massachusetts.[1]
States’ growing involvement in housing, both with respect to funding and policy (as captured in the NYU Furman Center Land Use Reform Tracker database of state reforms aimed at accelerating development and increasing housing supply), reflects their recognition that more resources are needed to address the housing crisis. However, states also face challenges in taking on a larger role. Most have restrictions on deficit spending, limiting investment in affordable housing to years when states’ economies are strong. With limited and variable resources, states also face difficult trade-offs in how to invest those funds. Some states prioritize funding the development and preservation of affordable housing and may use revolving funds or other tools to recycle their investment. Others support low-income households directly by funding rental assistance or helping first-time homeowners with mortgage costs.
Below, we first discuss examples of dedicated revenue streams for housing at the state level, before turning to financing tools and programs states are using to invest in affordable housing. Finally, we explain states’ role in administering federal housing funds.
Dedicated revenue streams for housing
States have used a variety of mechanisms to generate revenue for affordable housing development and preservation, including document recording fees, real estate transfer taxes, sales taxes, income taxes, and bonds.
Document recording fees
Some states fund affordable housing programs using document recording fees collected by local county auditors. For instance, Washington state imposes a $183 surcharge on documents such as deeds processed by auditors to help fund the state’s homelessness outreach and affordable housing maintenance programs. The fee was imposed to backfill a $70 million need.
Real estate transfer taxes and “mansion taxes”
Currently, 16 states earmark at least some part of their real estate transfer tax for affordable housing. Commonly, such taxes are used to fund the states’ housing trust funds. For instance, New Hampshire collects a 15-cent tax per $100 of the transaction amount from both buyers and sellers in a property transaction, which is set aside as designated funding for the state’s Affordable Housing Fund. Some states and localities are considering a more targeted tax for the sale of high-value properties known as a “mansion tax.”
Sales taxes
Some states, such as Minnesota, have raised sales taxes to generate revenue for affordable housing development and rental assistance programs. In 2023, the Minnesota state legislature imposed a 0.25 percent increase to the metro sales tax to top off the Minnesota Housing Finance Agency’s budget.
Income taxes
States like Colorado, through voter-approved measures, have allocated a portion of their income tax revenues towards supporting affordable housing. Through Proposition 123, Colorado voters approved directing 0.1 percent of the state’s income tax revenues to support affordable housing projects.
Bonds
The issuance of general obligation bonds are the preferred tool of states seeking to allocate substantial amounts of funding for the production and preservation of affordable housing. In the past three years, five states have approved bonds to create dedicated revenue streams for state housing programs. One such state is Rhode Island, where voters overwhelmingly approved Question 3, a ballot measure authorizing the state to issue $120 million in bonds to support the production of affordable housing. Bonds remain a popular solution for funding affordable housing due to their long-term horizon and the flexibility they provide compared to other revenue sources, which are fixed and subject to the state’s economic conditions.
State financing and funding tools
States have the power to invest in affordable housing by establishing housing trust funds, revolving funds, housing tax credits, grant programs, and land banking programs.
Housing trust funds
State housing trust funds are a flexible financing mechanism that can be used to support a variety of affordable housing activities. Ideally, funding for a state’s trust fund comes from a dedicated revenue source. States can also pass enabling legislation to allow or encourage localities to create their own housing trust funds. The flexibility of housing trust funds allows states to adapt their expenditures to changing local housing needs. Furthermore, many states have established specific housing trust funds for rural housing or workforce housing. Currently, there are 43 state housing trust funds with a dedicated funding source in the U.S.
Housing tax credits
Like the federal Low-Income Housing Tax Credit (LIHTC) program, states can create tax credits to generate private investment in affordable housing by providing a credit on taxes owed to investors. For example, Nebraska adopted a state low-income housing tax credit for owners of qualified affordable housing developments that receive the federal LIHTC. The non-refundable state tax credit is intended to help close the gap between revenue available through the LIHTC and actual project expenses and is awarded over a six-year period in an amount up to the federal LIHTC awarded to the property. Nebraska uses a real estate transfer tax to fund this program.
Tax incentives
States have the authority to create tax incentives for affordable housing or to empower local governments to develop their own. For instance, the New York State legislature established the 421-a Tax Incentive, which provides a partial real estate tax exemption for new housing in New York City that meets specific requirements. Additionally, other states, such as Maine, have enabled municipalities to establish tax increment financing (TIF) districts specifically for affordable housing. In these districts, any increase in new property tax revenue is used specifically to finance the development of affordable housing.
Grant programs
States can also develop specific grant programs to preserve, rehabilitate, and create new affordable housing units. For example, the California Department of Housing and Community Development has established the Farmworker Housing Grant program, which supports the development or rehabilitation of rental and owner-occupied housing for agricultural workers, with priority given to lower-income households.
Land banking programs
Some states have established land banking programs that provide qualified local governments and nonprofits with capital to acquire land for the development or restoration of affordable housing. For instance, Texas passed SB 1679, allowing the City of Houston to create a land bank dedicated to acquiring vacant property for the development of affordable housing. Another such statewide initiative was passed by Colorado voters through Proposition 123, which raised the state’s sales tax to establish a state land bank. The land bank provides local governments, tribes, and eligible nonprofits with grants and forgivable loans to acquire or preserve land for affordable housing.
Revolving funds
Many state housing finance agencies have established self-sustaining revolving funds to finance mixed-income housing. Revolving funds have been growing in popularity, with 13 states maintaining a revolving fund for affordable housing. These funds are set up to be self-sustaining, relying on interest payments from projects to replenish them. Revolving funds can take many forms. One such form, exemplified by Massachusetts’ Momentum Fund, supplements private capital for projects with affordability requirements. In Massachusetts, a $50 million fund has already supported the development of 325 units. Another design, exemplified by New York’s Housing Acceleration Fund, created a state partnership with co-lenders who administer the fund.
Public equity
States can also support the development and maintenance of affordable housing through equity investments. While rare, one example is Colorado’s Affordable Housing Financing Fund, established by Proposition 123. The fund provides long-term, below-market equity financing for affordable housing developments. The fund is specifically designed to support projects that are not reliant on state and federal housing tax credits.
State administration of federal housing funds
In addition to using state-generated funding for affordable housing, states exert control over a large amount of federal housing funds through their administration of the LIHTC program, private activity bonds, and the three HUD block grants: Home Investment Partnerships Program (HOME) grants, Community Development Block Grants (CDBG), Emergency Solutions Grants (ESG), and the National Housing Trust Fund (NHTF). Because LIHTC is administered entirely at the state level in most states, the decisions that states make in allocating LIHTC credits have a particularly large and systemic impact on the availability of funds for local affordable housing development. By contrast, the states’ administration of HUD block grants mainly impacts localities that do not receive their own direct allocation of HUD block grant funding. In some states, localities must request access to block grant funding from the state, while in others, the state might distribute its dollars to localities based on predetermined formulas. These application processes and funding formulas can allow states to encourage localities to use their federal dollars for specific goals, such as “green housing” or affordable housing targeted for specific populations. These programs rely on the congressional budget and appropriations process and are thus subject to shifts in federal requirements. Therefore, states should closely monitor federal legislation and explore alternative funding mechanisms for affordable housing at the state and local levels.
Low-Income Housing Tax Credits
The Low-Income Housing Tax Credit (LIHTC) is the largest government program in the U.S. dedicated to the creation and rehabilitation of dedicated affordable rental housing. LIHTC credits are allocated to states based on their population size. In most states, LIHTC credits are administered by the state housing finance agency; a few states sub-allocate LIHTC credits to local housing finance agencies. The award of LIHTC credits is governed by a policy document called a Qualified Allocation Plan (QAP), which describes the agency’s criteria for selecting projects, such as project location, population served, project characteristics, and developer capacity. The regular updates that state (and in some cases local) housing finance agencies make to their QAPs typically attract a significant amount of interest and attention from developers, advocates, local governments, and others, as the terms of the QAP determine which affordable housing developments get the coveted 9 percent credits. The One Big Beautiful Bill Act (OBBBA) increased the federal allocation to each state based on its population by 12.5 percent for a three-year period (2026-2029). The law also allowed for a basis boost, or an increase in the maximum LIHTC allocation for a development, of up to 30 percent in rural and tribal areas over the same timeframe.
Tax-exempt private activity bonds
Each state receives an annual allocation of tax-exempt private activity bonds that it can use to fund private activities with a public benefit. States can choose from a variety of eligible uses for these bonds, such as upgrades to infrastructure, construction of multifamily affordable rental developments, and home mortgages for first-time homebuyers. The bond is repaid with income generated from the activities financed. While private activity bonds can be used for multiple purposes, they are especially valuable when used to finance qualifying affordable rental housing, as this financing automatically triggers the receipt of federal 4 percent LIHTC credits. Many states also use private activity bonds to support homeownership for first-time homebuyers. The OBBBA also lowered the bond-financing threshold for housing developments that are financed by a combination of LIHTCs and private activity bonds from 50 percent to 25 percent.
Some states use all of their allotted tax-exempt bonds, while others use less than the full allotment and carry funds forward from year to year. In states where there is excess bond capacity, localities may be able to draw down additional financing for affordable housing by helping to facilitate more rental development that uses private activity tax-exempt bonds. State agencies are currently working to set policies to implement the new bond financing threshold.
When states issue private activity bonds for affordable rental housing, a housing finance agency (HFA) typically issues the bonds. In most cases, the HFA is a state-level agency, but some larger localities also have their own HFA or redevelopment authority authorized to issue private activity bonds for housing purposes. Multifamily bond transactions can be complicated and expensive, so they are generally reserved for larger affordable developments (or combinations of smaller properties bundled into a larger project).
State allocation of HUD block grants
In addition to administering the LIHTC program and private activity bonds, states play an important role in allocating four HUD block grants: CDBG, HOME, ESG, and the NHTF. This function is particularly relevant to smaller cities and counties that do not receive their own direct block grants from HUD.
HUD allocates block grant funding directly to entitlement communities (usually, large cities or counties) and to state agencies to distribute to non-entitlement communities. States must develop a Consolidated Plan every five years that lays out the state’s priorities for how it will spend HUD block grant funds, as well as annual action plans that describe spending plans for each year.
The block funds that states distribute to local governments can be very helpful in supporting the activities included in local housing strategies, such as the development of new or rehabilitated dedicated affordable rental housing or the promotion of homeownership. One of these funding streams (CDBG) can also be used to help fund the development of a comprehensive local housing strategy.
Community Development Block Grants
Through the federally administered CDBG program, states receive a formula-based allocation of funds. These funds are distributed, often by competition, to those localities that do not meet the population threshold to receive CDBG funds directly from HUD. The CDBG grants awarded to states can be used for housing and community development activities that meet the states’ goals as described in their Consolidated Plan. Federal CDBG funds generally must provide assistance to people with low- and moderate incomes, defined as less than or equal to 80 percent of the area median income (AMI). States generally award funds to non-entitlement communities through a competitive process. States have the latitude to design their own programs and set their priorities in their Consolidated Plans as long as they fall within the parameters of federal regulations.
CDBG-DR is a federal disaster recovery program that allocates funds to states and localities following a presidentially declared disaster. These funds generally follow the CDBG program rules and can be used for similar types of activities, with some exceptions. Localities and states must outline their needs in an Action Plan for approval by HUD. The development of an Action Plan includes a process for public input and feedback.
Home Investment Partnerships Program (HOME)
HUD allocates HOME funds directly to participating jurisdictions, which include consortia (groups of municipalities working together) and participating jurisdictions. Additionally, it allocates funding to states for distribution. HOME funds are used primarily to support the development or preservation of dedicated affordable rental housing and homeownership for low-income households. Tenant-based rental assistance is another eligible activity. Homeowners assisted through HOME must have incomes below 80 percent of AMI, while 90 percent of households assisted through affordable rental housing development may have incomes below 60 percent of AMI. So long as their plans are summarized in their Consolidated Plan, states can set their own priorities for use of HOME funds and design their own programs for direct funding of housing development. For example, states could prioritize projects that serve special/specific populations (e.g., at-risk youth or the elderly), rehabilitate older naturally occurring affordable housing, or require only a one-time infusion of funds.
Emergency Solutions Grant (ESG)
The ESG program is designed to help people experiencing a housing crisis or homelessness secure stable and affordable housing. ESG funds can be used for four primary activities: street outreach, rapid re-housing assistance, emergency shelter, and homelessness prevention. Like CDBG, ESG funds are allocated either directly to entitlement communities or to states for distribution to non-entitlement communities. States can set priorities for the use of ESG funds in their Consolidated Plan and Annual Action Plan.
Ultimately, the structure of and funding allocated to these grants are dependent on federal policy, and states should closely monitor ongoing shifts in federal priorities.
National Housing Trust Fund
The NHTF is a smaller HUD-administered block grant program designed to serve the lowest-income households, including those experiencing homelessness. The grant is allocated to states based on a formula annually, and HUD’s most recent rule dictates that when the allocation of funds is less than $1 billion in total, grantees must dedicate 100 percent of funds to families whose annual income does not exceed 30 percent of AMI. Awards are intended primarily for use in supporting the creation, rehabilitation, preservation, or operation of rental housing for the lowest-income households. The state agencies then determine which projects to fund. All assisted units must remain affordable for at least 30 years. The Housing Trust Fund is unique in that it is provided on a dedicated basis, rather than through congressional appropriations.
State role in federal incentive programs for investment in distressed areas
States also play a role in administering federal incentive programs to encourage investment in distressed neighborhoods, such as Empowerment and Enterprise Zones (discontinued in 2014) and the more recent Opportunity Zone Program, which was revised and made permanent in 2025 through the OBBBA. Opportunity Zones offer reductions in capital gains taxes for those who invest in designated distressed areas. Under the current version of this program, states designate up to 25 percent of their eligible census tracts as Opportunity Zones, then create an Opportunity Plan aligned with state priorities that identifies broad goals for the Opportunity Zones. The OBBBA set the current set of Opportunity Zones to end in 2026, with a new set to replace them in 2027. The new round of Opportunity Zones will have narrower geographic and median income eligibility standards. The OBBBA also introduced additional incentives for rural areas, offering up to a 30 percent capital gains tax exemption — significantly higher than the maximum 10 percent exemption available in other areas. By offering deferral of capital gains taxes and stepped-up equity investment, the Opportunity Zone program can help close the financing and funding gap for some qualifying affordable housing projects. State housing agencies have a role to play in assisting developers and local housing agencies in using these incentive programs to finance their local housing strategies.
Resources
The Cost of Fragmentation: A Comparison of State Affordable Housing Finance Governance Systems. This web resource from the Terner Center provides comprehensive information on state-level variation in affordable housing financing.
A new class of supply-focused housing investment programs. This report by the Center for Public Enterprise contains detailed case studies of state-level housing investment programs, including revolving funds.
Housing Trust Fund Project. This database from the National Low Income Housing Coalition provides statistics on the existence and size of state-level housing trust funds.
Footnotes
[1] These estimates are based on a review of the budget documents of all 50 states for fiscal years 2024, 2025, and 2026. For states with biannual budget cycles, we report annual allocations if provided. If not provided, we report investments evenly split between the two fiscal years. In calculating totals, we also add projected funds from bonds according to a projected revenue schedule.