House GOP Tax Reform Bill Retains LIHTC, Repeals Multifamily Housing Bonds
On Nov. 2, House Republicans unveiled a sweeping tax reform legislation called the Tax Cuts and Jobs Act (H.R. 1). It was introduced by Ways and Means Committee Chairman Kevin Brady. Although its provisions are generally in line with the House Republican Blueprint for Tax Reform released in June 2016 by House Speaker Paul Ryan (R-WI), and House Ways and Means Committee Chair Kevin Brady (R-TX), and the tax plan released by President Trump on April 26, 2017, it contains several unexpected provisions that are already controversial.
The bill would make significant changes to our current tax system. Some of the proposed changes receiving the most attention include a reduction of the number of income tax brackets from seven to four; the near doubling of standard deductions from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples; the capping of mortgage interest deductions at mortgages of $500,000; the elimination of the deduction for state and local income and sales taxes while property owners could write off up to $10,000 in state and local property taxes; and the phasing out of the estate tax by 2024.
While the LIHTC program was retained in the legislation, overall the legislation would have a negative effect on affordable housing and community development. We’ll discuss the aspects of the bill affecting affordable housing and community development. We’ll also discuss what happens now in the legislative process and action that can be undertaken to request support for the low-income housing tax credit and housing bonds in tax reform.
Corporate Rate Reduction
Under H.R. 1, the corporate rate would be reduced from 35 percent to 20 percent. The House Republican Blueprint for Tax reform also proposed a 20 percent corporate tax rate while the Trump plan offered a 15 percent tax rate. Leading up to the release of the House bill, there was considerable debate about whether this would be proposed as a permanent rate reduction or a temporary one. The bill reflects this as a permanent reduction, with no phase-in. It is unclear if the bill to be released by the Senate can keep the corporate tax rate this low.
One of the impacts of a lower corporate rate will be to lessen the amount of investment that will be made in affordable housing because it will reduce the overall tax benefits available from an investment. The federal government allocates low-income housing tax credits to each state based on population. The state, through its state housing finance agency or other allocating agency, then awards those credits to projects that best meet its Qualified Allocation Plan (QAP), which outlines the state ‘s goals for affordable housing. Each state establishes its own policies and procedures to determine which developers qualify for credits.
Once awarded credits, a developer sells them to an individual investor or, more commonly, to a tax-credit syndication fund made up of equity from one or from many investors. In return, the investors receive a credit against their federal income tax based on the size of their investments. They can also realize losses, which provide an additional tax benefit.
A drop in the corporate tax rate would mean the investor pricing for the LIHTC will have to drop to maintain yields. Essentially, investors would lower their bid price to compensate for the lowered tax benefits for procuring a low-income housing tax credit. In other words, if an investor contributes $1 for every $1 in tax credits, then she currently receives tax loss savings of 35 cents over the 15-year investment term. If the corporate tax rate is reduced to 20 percent, investors would be still able to claim the $1 in tax credits, but the value of the tax losses are reduced to 20 cents.
According to analysis by Novogradac & Company, lowering the corporate tax rate to 20 percent would reduce LIHTC equity by about 15 percent, translating to $1.2 billion or more in loss equity annually. This loss of investor equity translates into loss of 85,600 to 93,900 affordable rental homes over 10 years, or more.
Affordable housing advocates have argued that adjustments may be made to offset the impact of a lower corporate rate on LIHTC investment. Currently, The Affordable Housing Credit Improvement Act, introduced by Senator Maria Cantwell (D-WA) and Senate Finance Committee Chairman Orrin Hatch (R-UT) in the Senate (S. 548), and by Representative Pat Tiberi (R-OH) and House Ways and Means Committee Ranking Member Richard Neal (D-MA) in the House (H.R. 1661), would enhance the housing credit ‘s ability to meet affordable housing needs at a time when it is increasingly urgent. One way to address a lowered corporate tax rate is to increase the amount of allocable LIHTCs. The Senate version of the Affordable Housing Credit Improvement Act expands the LIHTC by 50 percent, while the House version does not.
Elimination of Private Activity Bonds, 4 Percent LIHTCs
Multifamily Housing Bonds are tax-exempt private activity bonds (bonds with private ownership that serve a public purpose) used by state Housing Finance Agencies to acquire, construct, and rehabilitate affordable multifamily housing units for low-income renters. Housing Finance Agencies and governmental entities sell housing bonds to investors, who accept a lower rate of return than they would receive on other investments because the interest on the bonds is exempt from federal income tax. Developers then benefit from a lower interest rate on affordable rental housing, which ultimately translates to lower rent prices.
Another beneficial feature of tax-exempt bonds is that they provide non-competitive 4 percent low-income housing tax credits for sites that meet certain requirements. Typical 9 percent LIHTCs are competitive and limited by the state ‘s allocation. Tax-exempt bonds partnered with 4 percent low-income housing tax credits are widely used by affordable housing developers. Housing bonds provide roughly half of all financing for the LIHTC annually. Together, the LIHTC and housing bonds finance approximately 50,000 affordable apartments each year.
Housing bonds trigger the 4 percent housing credit, which is not limited by the housing credit volume cap. However, tax-exempt bonds are limited by federal law, often referred to as the “volume cap.” In 2017, the state private activity bond cap is the greater of $100 multiplied by the state population or $305,315,000.
To qualify for an allocation of 4 percent LIHTCs, 50 percent or more of a site ‘s development costs must be funded by bonds during construction. The bonds need not come into the project at construction closing, but must be committed to the project before construction is completed.
This aspect of the House bill would contribute greatly to the reduction of the future supply of affordable housing. The latest data available from the National Council of State Housing Agencies shows that in 2015, 49,380 tax-exempt multifamily private activity bond-financed homes were awarded 4 percent LIHTCs. However, according to data from the Council of Development Finance Agencies, new tax-exempt multifamily bond issuance increased at least 51 percent or more in 2016; based on CDFA data the estimated number of rental homes financed is assumed also to have increased by 51 percent in 2016. And according to an analysis by Novogradac & Company, the repeal of the 4 percent LIHTC for tax-exempt bonds means a loss of roughly 788,000 to 881,000 affordable rental homes over 10 years, or more.
What Happens Now?
The tax-writing House Ways and Means Committee has begun considering the bill while the Senate prepares to release its own tax reform bill. The House Republicans’ goal is to have the bill passed by Thanksgiving and moved on to the Senate. Committee Chairman Brady has acknowledged that Republicans are looking to pass the tax bill quickly in order to notch a legislative victory before the 2018 midterm elections. The goal is for each chamber to pass tax reform legislation on the floor by Thanksgiving, work out the differences in a conference committee in December, and have the President sign tax reform into law by the end of the year.
This is an aggressive timeline and significant obstacles to passage remain. All indications point to the Senate using the budget reconciliation process to pass tax reform because it requires only 50 votes instead of the 60 votes required to enact legislation outside the reconciliation mechanism. Because there are only 52 Republicans in the Senate, Democratic votes would be needed to secure passage. This means that as currently enacted, the House bill cannot pass the Senate. This is because the budget was passed by the House and Senate on Oct. 26, 2017, and the budget reconciliation instructions, which must be followed in order to change tax rules via the reconciliation process, allow for a tax bill to be passed that would increase the deficit by up to $1.5 trillion over the next 10-year period. The deficit cannot be increased by the tax legislation after the 10-year mark. The House bill is estimated to increase the deficit by approximately $1.5 trillion over the next 10-year period.
Critically, however, there are not enough measures in the bill to stop the increase in deficit beyond a 10-year period. There are no tax cuts that expire in the 11th year, or tax increases that go into effect in the 11th year. In other words, the House bill does not provide for enough of the tax cuts to be temporary, or provide for additional tax increases after 10 years that would ensure that the deficit doesn’t continue to increase after the 10-year period. Unless the bill is significantly amended prior to its passage in the House, it almost certainly will not pass in the Senate.
Meanwhile, the Senate has been working on its own bill, and because the Senate most likely will use the reconciliation process, its bill will almost certainly have tax or revenue increases (as compared with the House bill), or a time limit on tax cuts.
Given that the House Republicans have a goal for completing tax reform by the end of the year, there is sure to be a great deal of activity and discussion of the bill in the coming weeks. At the House level, there has been no indication that the committee intends to make substantive changes that impact affordable housing during the mark-up, either to restore the tax exemption on multifamily housing bonds or to include modifications to sustain the housing credit ‘s production potential under a reduced corporate tax rate. However, these types of changes to the bill may be made before it goes to the House floor for a vote. And at the Senate level, the Senate Finance Committee is expected to release its own tax reform legislation after the House concludes its mark-up of the bill.
Affordable housing advocates are strongly recommending The A Call To Invest In Our Neighborhoods (ACTION) campaign, a coalition of over 2,150 national, state, and local organizations and businesses working to address our nation ‘s severe shortage of affordable rental housing by protecting, expanding, and strengthening the LIHTC, and are encouraging constituents to contact Congress and request support for affordable housing in tax reform.
Specifically, the campaign is asking constituents and organizations to educate senators about the connection between multifamily housing bonds and the LIHTC, and the negative impact of the House ‘s bill on affordable housing. The campaign encourages asking senators to convey their support to Senate Finance Committee Chairman Orrin Hatch (R-UT) and Senate Majority Leader Mitch McConnell (R-KY) for retaining the housing credit and housing bonds, and making other adjustments to the LIHTC program to offset the impact of a lower corporate rate.
The campaign is also asking constituents to reach out to House Republicans, both on and off the Ways and Means Committee, asking that they reach out to Speaker Paul Ryan (R-WI) and Ways and Means Chairman Kevin Brady (R-TX) to urge them to preserve housing bonds, and make other adjustments to the housing credit to offset the impact of a lower corporate tax rate. The campaign encourages asking them to at least publicly voice their concern about the impact of eliminating Private Activity Bonds, either as part of the committee mark-up for members on the Ways and Means Committee, or in the press. For a model letter you can adapt and send to your representatives, see “Ask Representatives to Support the LIHTC and Housing Bonds in Tax Reform,” below.