Community Development Tax Expenditures Remain a Fraction of Other Expenditures

Published by Peter Lawrence on Wednesday, December 2, 2020 - 12:00am

The Joint Committee on Taxation (JCT) recently released its Estimates of Federal Tax Expenditures for Fiscal Years 2020-2024, which reports, yet again, that estimated tax expenditures for affordable housing and community development tax incentives – the low-income housing tax credit (LIHTC), historic tax credit (HTC), renewable energy production tax credit (PTC), renewable energy investment tax credit (ITC), and new markets tax credit (NMTC) and the Opportunity Zones (OZ) incentive – cost the federal government much less in lost tax revenue than many other notable tax expenditures.

With Congress going on recess in several weeks - the House of Representatives is in session until Dec. 10 and the Senate goes on recess Dec. 16 – there is a short time to address a number of issues before the end of the year. During this busy lame duck session, in addition to passing a continuing resolution or fiscal year 2021 omnibus spending bill to fund the government and possibly another COVID-19 relief package, there are a number of housing and community development tax incentives that advocates would like to see attached to year-end legislation. High on the list of priorities is the extension, or better yet permanence, of the NMTC, which is set to expire on Dec. 31, as well as extending the PTC which also expires at the end of the year and restoring the 30 percent ITC. .  Furthermore, the housing community advocates the setting of a 4 percent floor for the LIHTC, which has been at historic lows due to the effect of COVID-19 on federal borrowing rates. The low cost of these incentives, especially compared to the benefits they provide, can help to make the case for their extension and enhancement.  

The following tables show the 10 largest corporate and individual tax expenditures. The expenditures in each table represents the total estimated tax expenditures – from both individual and corporate taxpayers. Corporate indicates the tax expenditures that were primarily or exclusively claimed by corporations; individual indicates the tax expenditures that were primarily or exclusively claimed by individuals. As the tables show, the amount of tax expenditures that primarily benefit individuals is larger than that for corporations.

The CARES Act provided an exception to required minimum distribution rules for defined contribution plans and extended the due date for minimum required contributions of defined benefit plans that would have been due in 2020, which is why these two individual tax expenditures have increased notably since the previous five-year estimate.

Blog Table: 10 Largest Individual Tax Expenditures
Click to Enlarge


Blog Table: 10 Largest Corporate Tax Expenditures
Click to Enlarge


In comparison, the table below shows community development and renewable energy tax expenditures, including the LIHTC and NMTC. For the outsized benefit these incentives provide, all combined the cost of community development and renewable energy tax credits – at $121 billion over a five-year period – are still well below the cost of many tax expenditures.

Blog Table: Community Development and Renewable Energy Tax Expenditures
Click to Enlarge


The LIHTC, accelerated depreciation for rental housing, tax-exempt multifamily housing bonds, ITC, PTC, NMTC, OZ and HTC are responsible for providing significant benefits for affordable housing, community development, historic preservation and renewable energy. With the ongoing hardship raced by renters due to the COVID-19 pandemic-related economic downturn, supporting incentives like the LIHTC, which is responsible for the creation and preservation of over three million affordable rental homes since its creation, is now more important than ever. This cost-benefit analysis is even more remarkable when one considers that the home mortgage interest deduction costs twice as much as the LIHTC, even with the changes implemented by the Tax Cuts and Jos Act (TCJA) of 2017, as detailed in the table below.

Likewise, investing in low income communities will be vital for the economic recovery. The NMTC has proven to be successful not only at drawing investment to these communities, for every $1 invested by the federal government the NMTC incentive generates more than $8 of private investment, but also creating jobs – financing from the 2019 allocation round was responsible for the creation of 57,414 jobs, 35,440 of which are permanent. The NMTC is set to expire Dec. 31 and these benefits far outweigh the low cost borne by the federal government. Investment in qualified opportunity funds (QOFs) topped $12 billion as of September, per Novogradac’s fund manager survey, an increase of 19.4 percent from the survey last conducted in April. Extrapolations made by the White House Council of Economic Advisors using Novogradac data has placed total investment in QOFs at $75 billion. This increase in investment is a positive sign for the ability of the OZ incentive to address the needs of low-income communities, especially as tools for recovery are desperately needed.

Since its inception, $30.8 billion in HTCs have generated more than $35.9 billion in federal tax revenue. That HTS has also leveraged $162.0 billion in private investment, and is responsible for the creation of over 2.6 million jobs and the preservation of more than 44,000 buildings.  

The ITC and PTC have also been responsible for benefits that far outweigh their cost to the federal government. In the 14 years since the ITC was enacted, it can be credited with helping the solar industry: create more than 200,000 jobs; invest $140 billion into the U.S. economy; increase solar deployment by more than 10,000 percent; and, grow by an average annual rate of 52 percent each year. Similarly, the wind industry owes its growth to the PTC. The American Wind Energy Association lists the reduction of wind power costs by 70 percent over the last decade and the 120,000 jobs supported by the wind industry among the achievements made possible by the PTC.

When examining the costs of various tax expenditures, at the top of the list are itemized deductions, which are the largest government revenue costs. The table below provides estimates for what were traditionally three of the largest expenditures. Since passage of the TCJA, there has been a dramatic decrease in the estimates for these itemized deductions in the fiscal year (FY) immediately after passage. In addition to effects seen as a result of the TCJA, the impacts of more recent tax provisions, most notably measures connected to COVID-19-related relief provided this year, can be observed in the JCT estimates.

Blog Table: Itemized Deductions 2016-2024
Click to Enlarge


In a prior post written after the passage of the TCJA, Novogradac noted the largest decrease would be in the deduction of state and local taxes, and the “cost” of this expenditure would continue to decline until the cap expires in 2025, unless the cap is repealed prior to that year, or it is extended in future tax bills. The CARES Act, the most recent pandemic relief package, provided relief to tax payers in a number of areas. In the taxable year beginning in 2020, the CARES Act provides a partial above-the-line deduction for charitable deductions, hence the projected increase in the expenditures for charitable deductions over 2020-2024.

Homeownership vs. Rental housing tax incentives

All combined, the estimates of forgone tax revenue for homeownership expenditures are 4.5 times those for rental expenditures. This is remarkable considering that the deduction for property taxes on real property is just a fraction of what is was prior to changes ushered in by the TCJA. The change in the mortgage interest deduction due to the TCJA is also evident in the table above. Post TCJA, the JCT stopped reporting the deduction for property taxes on real property as a separate estimate. The last reported estimate for this expenditure was the 2016-2020 estimate that placed the value of this deduction at $180 billion, 49 percent of the estimate of all state and local tax deductions ($389 billion) over 2016-2020. Absent another method, the percentage of property tax deductions to overall deduction of state and local government taxes seen pre-TCJA was applied to the current JCT tax expenditures, which yields a 2020-2024 estimate of $57.1 billion. Novogradac acknowledges that this figure likely underrepresents the actual deductions taken. Property taxes are known to be stable while income taxes are variable across states; there is a good chance the percentage of the state and local taxes deductions attributable to property tax deductions has increased since the $10,000 cap on state and local tax deductions was established by the TCJA.

Blog Table: Housing Tax Expenditures
Click to Enlarge


When considering proposals for economic recovery as the country plots a course for dealing with the coronavirus pandemic, the community development tax incentives are a valuable piece of the puzzle. The fact that they cost much less than the tax benefits provided to individuals or corporations makes them all the more attractive, with the cost-benefit analysis swings in their favor.