Dynamic Scoring of Tax Reform Proposals Could Improve Outlook for Investable Tax Credits

Published by Michael Novogradac on Wednesday, September 4, 2013 - 12:00am

Recent reports indicate that when analyzing tax reform plans currently being created by House Ways and Means Committee Chair Dave Camp, R-Mich., and Senate Finance Chair Max Baucus, D-Mont., the Joint Committee on Taxation will use dynamic scoring as well as traditional, static scoring to consider the effects of various proposals. This technical detail could have significant implications for how certain tax credit provisions fare during the reform process.

The JCT staff is required by House Rule XIII(3)(h)(2) to provide a macroeconomic impact analysis of all tax legislation reported by the Ways and Means Committee. For many tax bills, the expected macroeconomic effects are so small that a brief statement is all that is required. But some legislation requires more detailed analysis. In order to account for the sensitivity of the analysis to different modeling assumptions, and different modeling frameworks, JCT staff uses several different models to simulate the macroeconomic effects of changes to tax policy.

Broadly speaking, dynamic scoring predicts the impact of fiscal policy changes by forecasting the effects of reactions to those changes. Supporters of the method believe it yields a more accurate prediction of a policy’s impact. However, it can be difficult to apply in practice because of its complexity.

That said, according to a report released on Aug. 26 by the Tax Foundation, using dynamic scoring could make tax reform “30 percent less challenging.” By this, the Foundation means that dynamic analysis shows that cutting individual tax rates is 21 percent less costly than the static estimate produced by JCT. Cutting corporate tax rates would be 59 percent less costly. Combined, the Tax Foundation found these tax cuts would be 30 less costly than a static estimate.

While there is disagreement about the specifics and degree, most economists agree there are dynamic effects from the low-income housing tax credit (LIHTC), new markets tax credit (NMTC), historic tax credit (HTC) and renewable energy tax credit (RETC) programs. For example, the LIHTC supports about 100,000 multi-family units a year, which generally accounts for a quarter to a third of all annual multi-family construction.

For the LIHTC and NMTC, the revenue costs are spread over a number of years and the dynamic benefits are greatest in the early years of the projects subsidized. As such, under dynamic scoring, these two tax credits might be considered revenue positive, or at least revenue-neutral, over a 10-year scoring period.

For the HTC, the revenue cost comes when a property is placed in service, but the leverage is quite large, such that projected revenue loss should be substantially less and possibly positive.  For RETCs, the production tax credit has a dynamic scoring impact more like the LIHTC and NMTC, and the investment tax credit is more similar to the HTC.

Novogradac & Company continues to analyze the interaction between dynamic scoring and the LIHTC, NMTC, HTC and RETC.  So stay tuned!