Guest Post: House Tax Reform Proposes Eliminating PA Bonds and Associated 4% LIHTC
By: Eric Barnett, CPA, Novogradac & Company LLP
Peter Lawrence, Director, Public Policy & Government Relations, Novogradac & Company LLP
The House Ways and Means Committee released tax reform legislation and summary documents Nov. 2, which is being considered in committee this week. The legislation was guided by the principles laid out in the Sept. 27 “Unified tax reform framework,” and as expected from the framework, the legislation explicitly retains the low-income housing tax credit (LIHTC), a tremendous achievement for the affordable housing community. Unfortunately, the legislation repeals the tax exemption for private activity bonds, including multifamily tax-exempt bonds, which over the next 10 years are estimated to finance more than 60 percent of all LIHTC-financed affordable homes annually.
According to Novogradac & Company analysis, the Tax Cuts and Jobs Act, House Ways and Means Committee Chairman Kevin Brady’s, R-Texas, landmark tax reform legislation, would reduce the future supply of affordable rental housing by nearly one million homes. That would translate to a reduction of as much as two-thirds of the current production of affordable rental housing provided by the LIHTC program. In California, it is estimated that nearly 262,110 affordable rental homes would be lost, equivalent to nearly 296,180 jobs lost, $24.9 billion in lost local business income, and nearly $9.6 billion in lost federal, state, and local tax revenue. The primary driver of that reduction is the elimination of private activity bonds and the associated 4 percent LIHTCs on developments financed by these bonds.
The latest data available from the National Council of State Housing Agencies (NCSHA) 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 (CDFA), 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. Accordingly, 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.
On balance, it appears that Chairman Brady’s tax reform legislation would reduce the total amount of LIHTC-financed affordable rental homes by about 882,000 to 983,000, or more, over 10 years. While the elimination of private activity bonds and associated 4 percent LIHTCs is the largest factor, other changes proposed by the bill such as lowering the corporate tax rate from 35 percent to 20 percent and changing the inflation factor for future LIHTC allocations would negatively affect the number of rental homes built or renovated by the LIHTC. Furthermore, given the lower financial feasibility under a lowered corporate rate, the changes would also result in rental homes that would likely serve higher average income levels, while providing fewer amenities and/or social services.
The release of legislation reveals what tax benefits would be curtailed in addition to the ones it would provide, underscoring the difficulty of getting tax reform through Congress, which is why deliberation of tax reform is expected to proceed at a lightening pace. The longer Congress considers tax reform, the more pressure it will receive to add back tax provisions repealed or make other changes to lessen the impact of provisions to offset the cost of tax rate cuts and other tax benefits.
If the Ways and Means Committee approves tax reform legislation this week as anticipated, the full House is expected to consider the bill the week of Nov. 13. Meanwhile the Senate Finance Committee is expected to release its tax reform bill on Nov. 10 and consider its version of tax reform legislation the week of Nov. 13. The Senate version is expected to have notable changes to the House version, likely being more moderate on several tax provisions and policy than the House bill. The Senate bill is expected to be more conducive to affordable housing, community development, and renewable energy.
If the Senate committee approves its version of a tax reform bill the week of Nov. 13, Senate Majority Whip John Cornyn, R-Texas, said he expects the full Senate to consider the bill before Thanksgiving.
If this time frame holds, that would leave December for the House and Senate to reconcile differences between the bills, and significant differences are expected. The goal would be to send a final tax reform bill to the president by the end of the calendar year.
Given the difficulties of tax reform, it will extremely hard for Congress to maintain this schedule, and it may slip to 2018. In addition, the final form of tax reform may look largely different from what is being proposed by the House Ways and Means Committee in the Tax Cuts and Jobs Act. However, Congress is also under extreme pressure to pass tax reform, and as such community development tax credit advocates should take the aggressive schedule seriously.
There are many twists in the road ahead as Congress considers tax reform. Please visit www.taxreformresourcecenter.com for the latest news and analysis from Novogradac & Company LLP.