TAX REFORM IS CERTAIN TO WEAKEN LIHTC BUT FATE OF PRIVATE ACTIVITY BONDS REMAINS UNCLEAR
On Dec. 2, the Senate passed the Tax Cuts and Jobs Act. Like the House Bill, it lowers the corporate tax rate from 35% to 20%, which reduces Low Income Housing Tax Credit prices by about 15%. It is expected that this will reduce the amount of equity capital invested nationally by around $2 billion annually, resulting in around 90,000 fewer units over ten years.
The bill includes several changes from the version that passed the Senate Finance Committee. As in the House bill, the amended Senate bill now provides a deduction for state and local property tax up to $10,000. It also includes some significant differences from the House Bill for affordable housing. It is unlikely that these differences will be an obstacle given the GOP’s intent to speedily enact tax reform legislation.
A conference committee, with members from the House & Senate, is expected to meet on Dec. 5th or 6th to draft and approve a conference report. The conference report would then be voted upon in the House and Senate. The President would then sign the bill into law.
While there is still uncertainty if Private Activity Bonds will remain after the House and Senate conference the two bills, it seems likely that the final package will more closely mirror the Senate version, which retains private activity bonds. However, given what is at stake for affordable housing in NY, it is still important to reach out to NY Republican Members of Congress today and tomorrow and ask them to continue to advocate to maintain Private Activity Bonds in conference. Use the opportunity to thank members that signed Rep. Randy Hultgren’s (R-IL-14) letter to save PABs.
- Reduces the basis boost percentage for all properties from 30% to 25%. Coupled with the loss of equity due the lower corporate rate, affordable housing would take a big hit in terms of loss of equity in projects. The provision applies to properties placed in service after date of enactment, affecting properties that have already received credit allocations and/or issued bonds, have lined up debt and equity financing, and are well into the development process. These projects will have to return credits already awarded, find alternative sources of funds to fill new financing gaps created. There is some hope that 30% boost will be retained in conference.
- This last minute change to the basis boost was made to “pay for” an amendment which automatically provides a 25 percent basis boost to 9 percent LIHTC developments located in rural areas as defined under section 520 of the Housing Act of 1949. For such rural properties, it would remove the current law discretion that state agencies have on providing a 30 percent basis boost.
- Adds veterans to the existing LIHTC law exception to the general public use requirement, enabling developers to target their LIHTC developments to veterans.
- As a means of protecting the tax base of foreign-owned corporations or U.S. corporations with significant foreign operations, the amended Senate bill imposes essentially an international alternative minimum tax on those corporations. That “base erosion minimum tax” likely will prevent several significant corporate investors from claiming tax credits like LIHTC. Nationwide, it is estimated to potentially deter investors that account for between 10% and 25% of capital invested in LIHTC. An amendment from Sen. Charles Grassley, R-Iowa, would help address this issue by allowing qualifying taxpayers to potentially avoid losing the value of tax credits in years they are subject to the BEAT.
- Permanently lengthens the depreciation period for nearly all residential real estate properties from 27.5 years to 30 years, but also permits, for a period, expensing of personal property and land improvements.
- Eliminates all Private Activity Bonds including multifamily bonds, which are accompanied by 4% housing tax credits and also Mortgage Revenue Bonds.
The Continuing Resolution for the federal budget expires on Dec 8th. Another CR, possibly a short term one, is likely. The debt limit must also be raised. While we may see continued funding at current levels in the short term, the Senate tax plan increases the national debt by $1 trillion over a decade according to the Joint Center on Taxation. The estimate released on Saturday by the Congressional Budget Office only a few hours after the vote is even higher at $1.4 billion. Increasing the debt is sure to be followed by calls to cut non-defense discretionary programs such as housing as well as safety net programs like Medicare, Medicaid, and Social Security.
Affordable Housing advocacy is more important than ever!