Time Again for Tax Extenders

By Michael J. Novogradac, CPA

The inability of lawmakers to agree last year on how to pay for a year-long extension of the payroll tax holiday came with a thin silver lining for the affordable housing, community development and renewable energy communities: a conference committee that has been formed to create another piece of tax extension legislation that will likely be passed by February 29. That legislation would extend the payroll tax holiday, unemployment insurance and other provisions that expire at the end of February. And this second, longer extension bill is the first - but not only - vehicle that offers hope for the extension of the New Markets Tax Credit (NMTC) program, the renewable energy production tax credit (PTC) and the 9 percent floor for the low-income housing tax credit (LIHTC).

Conferees began meeting in mid-January. In the best case scenario, the legislation that comes out of this conference committee will include additional business tax extenders, such as an extension of the NMTC, which expired in December, or the renewable energy PTC, which is set to expire at the end of this year. However, at least one conferee, Rep. Xavier Becerra, D-Calif., has said that it is unlikely that additional extenders will be added to the agreement because of the short timeline. The other major consideration that could frustrate the passage of a larger extenders package is the cost of additional provisions and finding revenue offsets that could pass both houses of Congress.

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If not approved in the payroll tax package, the NMTC, PTC and LIHTC floor provisions could still be included in a larger business tax extenders package later this year. According to the Joint Committee on Taxation's "List Of Expiring Federal Tax Provisions 2011-2022," 60 federal tax provisions expired in 2011 and another 41 are slated to expire this year.

New Markets Tax Credit Program
Although the NMTC program has technically expired, many community development professionals are confident that it will eventually be renewed. Likewise, officials at the Community Development Financial Institutions (CDFI) Fund are hopeful.

Speaking to attendees at the 2011 New Markets Tax Credit Coalition Annual Conference in December, CDFI Fund Director Donna Gambrell acknowledged that the NMTC program faces a degree of uncertainty because Congress had not yet reauthorized the program for calendar year 2012. However, she noted that the President's budget does include the NMTC program for 2012, and she assured the audience that the CDFI Fund has been doing everything it can to ensure that Congress understands the vital role the program plays. She said, "Despite the difficult budget negotiations, we remain optimistic that the NMTC program will be extended."

On December 14, Rep. Marcia Fudge, along with her Ohio colleagues Reps. Marcy Kaptur, Dennis Kucinich, Tim Ryan and Betty Sutton, sent a letter urging Minority Leader Nancy Pelosi, D-Calif., and Speaker John Boehner, R- Ohio, to include an extension of the NMTC in a year-end tax bill. In their letter, the Democratic lawmakers hailed the NMTC as a job creator and an effective tool to spur economic development and help small businesses grow. The letter noted that between 2004 and 2010, the NMTC has generated more than $1 billion in private capital that has been invested in businesses based in Ohio.

The next day, on December 15, Rep. Richard Neal, D-Mass., took to the House floor in support of the NMTC. In his remarks, Neal described the positive economic impact of the program on a national level and said he believes the program should be made permanent. He also spoke about the success of the NMTC in Massachusetts, noting that more than 170 businesses in his state have received new markets tax credit financing.

Bipartisan measures to extend the NMTC have been introduced in both houses of Congress and continue to gather bipartisan support. H.R. 2655, the New Markets Tax Credit Extension Act of 2011, would extend the NMTC through 2016, authorizing $5 billion in authority each year. At the time of this writing the bill had 55 cosponsors, including conference committee member Rep. Allyson Schwartz, D-Pa. S. 996, the companion bill in the Senate, has 22 cosponsors, including Sens. Ben Cardin, D-Md., and Bob Casey, D-Pa., also members of the conference committee.

Renewable Energy Production Tax Credit
The impending expiration of the renewable energy PTC is expected to begin affecting market conditions even before its current sunset date of December 31, 2012. Historically when the PTC has been allowed to expire, investment in wind energy projects has declined dramatically. Because wind project developers are hesitant to schedule future projects without the certainty of having the tax credit in place, an extension is necessary to maintain investor confidence.

The American Wind Energy Association (AWEA) released a report late last year on the production tax credit. The study, "Impact of the Production Tax Credit on the U.S. Wind Market," was conducted by Navigant Consulting and considered what would happen if the PTC is allowed to expire at the end of 2012, as well as what would happen if the PTC is extended for four years and expires in 2016.

Navigant found that if the PTC was not extended, the U.S. wind market would contract significantly in 2013. According to the study, total wind-supported jobs would decrease from 78,000 to 41,000, and total wind investment would decrease from $15.6 billion to $5.5 billion. On the other hand, if the Congress extended the PTC until 2016, the report indicates the wind market would continue to grow through 2016. Navigant's study found that total wind-supported jobs would grow to 95,000 by 2016 and total wind investment would grow to $16.3 billion in 2016.

On November 29, Rep. Bruce Braley, D-Iowa, urged House leaders to include a four-year extension of the energy production tax credit in any year-end tax extender legislation. On November 2, he introduced H.R. 3307, the American Renewable Energy Production Tax Credit Extension Act, which would extend the PTC for four years, though 2016. In his letter to House leadership, Braley said that an immediate, four-year extension of the PTC would provide more certainty for the wind energy industry, and that would encourage increased investment and job creation. At the time of this writing, H.R. 3307 had 45 cosponsors, including three conference committee members: Reps. Schwartz, Sander Levin, D-Mich., and Henry Waxman, D-Calif.

Low-Income Housing Tax Credit Floor
While the LIHTC program itself is not currently subject to expiration, a key provision enacted under the Housing and Economic Recovery Act of 2008 (HERA) is scheduled to sunset at the end of this year. To provide more certainty for investors, HERA temporarily set a 9 percent tax credit percentage floor for the LIHTC. This provision expires for developments placed in service after December 30, 2013.

However, because properties financed with housing tax credits generally take as many as two years to develop, many investors, syndicators and state allocating agencies will need to underwrite allocations using the floating rate starting in 2012. For January 2012 that floating rate was 7.44 percent, which is 17 percent less than the 9 percent rate. For developments that have no excess eligible basis at the 9 percent floor rate and are already using the 30 percent difficult to develop bonus, this would translate into a 17 percent loss in tax credit equity.

On December 14, a bipartisan, bicameral group of lawmakers introduced legislation to make permanent the 9 percent tax credit percentage floor for the low-income housing tax credit. The legislation would also extend the same policy to 4 percent allocated housing tax credits, but not 4 percent LIHTCs generated by tax-exempt bond financing. Attaching this legislation to a tax extenders package presents a challenge that is not faced by the NMTC or PTC extensions, because the 4 percent floor has not been enacted into law.

That said, the measure continues to gather bipartisan support. The House bill is H.R. 3661, and as this article went to press it had 10 cosponsors. The Senate bill is S. 1989, and at the time of this writing, it too had 10 cosponsors, including two conference committee members: Sens. Ben Cardin, D-Md., and Mike Crapo, R-Idaho.

What You Can Do
Contact your legislators and let them know why you support these important provisions. Whenever possible, communicate to them the benefits these tax credits are providing in their states and home districts. It's critical to translate these programs from arcane sections of the tax code into real world results, such as new jobs and increased economic activity.

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Copyright 2012 • By Novogradac & Company LLP • All Rights Reserved

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