Confirmed, Again: Cost of Community Development Tax Incentives is Comparatively Small
Late last month the Joint Committee on Taxation (JCT) released its Estimates of Federal Tax Expenditures for Fiscal Years 2017-2021. As in years past, the report highlights the comparatively low cost of 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) compared to other tax expenditures. New this year is the Opportunity Zones (OZ) incentive, created as a result of tax reform in late 2017.
The effects of tax reform can be seen when looking at the yearly forgone revenue for certain expenditures. Itemized deductions represent the largest government revenue costs and the three listed in the table below will see significant decreases in expenditures. The mortgage interest deduction will cost $216.6 billion between 2017 and 2021, down from $357 billion estimated for 2016 to 2020. One of the largest decreases over the five-year period can be found in the deduction of state and local taxes. The 2017 estimate is for $100.9 billion in expenditures. As a result of tax reform and the limitation placed on state and local tax deductions, the 2018 estimate is for just $36.6 billion. The annual tax expenditure is expected to increase to $173 billion in 2026, when the $10,000 limitation on deductions is scheduled to expire.
The following tables show the top ten corporate and individual tax expenditures. 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 benefit individuals is larger than that for corporations.
For comparison purposes, the following table shows community development and renewable energy tax expenditures, which includes LIHTC and NMTC tax credits.
Even though the largest threats posed by tax reform appear to have receded now that it has been passed, it should be noted that calls to eliminate housing, community development and energy tax credits in the name of savings belies their relative inexpensiveness compared to other expenditures. These programs not only provide considerable benefits for affordable housing, poverty reduction, environmental protection, and historic preservation, they do so for a fraction of the cost of other tax expenditures.
The LIHTC, accelerated depreciation for rental housing, tax-exempt multifamily housing bonds, ITC, PTC, NMTC, OZ and HTC each cost just a fraction of the most expensive expenditures and none are within the top 20 most expensive revenue costs. The largest tax expenditure, the exclusion of employer contributions for healthcare and insurance premiums, will cost over eight times the cost of the LIHTC, PTC, NMTC, HTC, OZ and ITC combined.
A total of $101.3 billion is expected to be spent on the LIHTC, PTC, NMTC, HTC, OZ and ITC over the five-year period. The tables above illustrate how these costs stack up against some of the largest tax expenditures. The LIHTC represents nearly half of the credit expenditures. Still, the LIHTC falls well outside the most expensive programs in the government and the benefits of the creation of affordable housing far outweigh the comparatively low cost of the credit.
While the LIHTC is the most expensive tax credit expenditure, its costs, coupled with all the other expenditures for rental housing, are just a fraction of what is spent for tax benefits geared towards homeowners. Nearly seven times as much is spent on homeownership than is spent on rental housing, down from the 10-1 ratio seen in the 2016-2020 estimates.
It should be noted that the most recent five-year estimate does not include the deduction for property taxes on real property. The 2016-2020 estimate for the item was $180 billion. Using this figure, and the JCT total for state and local government taxes for that timeframe, Novogradac estimates the 2017-2021 deduction for property taxes on real property would be $68.3 billion (acknowledging this figure likely underrepresents the actual deductions taken).
The main takeaway from the latest JCT expenditure release is that the benefits of the LIHTC, NMTC, HTC, ITC, OZ and PTC far outweigh the small savings that would result from altering or eliminating any of these incentives. With talk of another round of tax reform, advocates can highlight this fact should any of these incentives come under fire.