Chained CPI Could Mean Hundreds of Millions of Dollars Less in LIHTC Equity

Published by Michael Novogradac on Monday, April 22, 2013 - 12:00am

Last week the Ways and Means Committee Subcommittee on Social Security held the first in a series of hearings on the president’s and other bipartisan entitlement reform proposals. The hearing focused on using the chained Consumer Price Index (CPI) to determine the Social Security cost-of-living adjustment. This proposal was included in the president’s fiscal year (FY) 2014 budget proposal; it has also been proposed by the National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center’s Debt Reduction Task Force.

In his testimony at the April 18 hearing, Jeffrey Kling, associate director for economic analysis with the Congressional Budget Office (CBO), reported that “the chained CPI grows more slowly than the traditional CPI does: an average of about 0.25 percentage points more slowly per year over the past decade. As a result, using that measure to index benefit programs would reduce federal spending … In addition, indexing tax provisions with the chained CPI would increase revenues.”

So what would this mean for the low-income housing tax credit (LIHTC)? On a year to year basis, the changes would be minor. But compounded over time, the cumulative effects become quite meaningful.

For instance, our initial calculations indicate that, if the chained CPI had been used since 2003 to calculate the annual inflation adjustment for the LIHTC authority, the cumulative compounded effect on the annual per capita amount in 2013 would be a loss of 10 cents; a $2.15 annual cap, rather than the current amount of $2.25 that was set in in Revenue Procedure 2012-41. This is a reduction of 4.4 percent. The cumulative impact on the small state minimum would be about 3 percent.

Assuming an annual 9 percent LIHTC equity market of $7 billion, this would represent a reduction of approximately $300 million in tax credit equity in 2013 to build and renovate affordable housing.

Similarly, if states’ tax-exempt bond authority had been determined since 2003 using the chained CPI, the amount used to calculate the state ceiling for the volume cap for private activity bonds in 2013 would be $90 multiplied by the state population rather than the $95 level set in Rev. Proc. 2012-41. This is a reduction of 5.3 percent. The small state minimum would have a smaller, 3 percent reduction.

Note: Small state minimums compose about 5 percent of 9 percent LIHTCs and 20 percent of private activity bond volume cap.