Effect of Historic Tax Credits on Corporate and Individual Tax Rates

Published by Michael Novogradac on Monday, November 11, 2013 - 12:00am

A couple weeks ago Congress launched a new round of budget talks, which reports suggest could have implications for comprehensive tax reform, and House Ways and Means Committee Chair Dave Camp, R-Mich., said that tax reform is on the table “this year, 2013.” One of the goals advocated by some tax reformers is to reduce the top corporate tax rate to less than 35 percent; to do this, Congress would have to reduce and/or eliminate certain tax expenditures.

Last month, we discussed how small an effect the repeal of the low-income housing tax credit (LIHTC) would have on lowering the top corporate tax rate. This week, we’ll talk about the effect of historic rehabilitation tax credit (HTC) repeal. According to the Annual Report on the Economic Impact of the Federal Historic Tax Credit for FY 2012, the HTC has created 2.3 million jobs, leveraged $106 billion in private capital and restored 38,700 historic buildings since it was created 35 years ago. Thus, any consideration of repeal must be weighed very carefully; only an inordinately large tax savings could theoretically justify the HTC repeal.

So what does the data say?

Repealing the HTC for individuals and corporations and pouring the savings into reducing the top corporate tax rate would yield a 0.17 percent reduction in the first year (from 35 percent to 34.83 percent). If we used those savings to reduce the top individual tax rate, we would see a .04 percent reduction in the first year (from 39.6 percent to 39.56 percent).

What about the future? Let’s look at what would happen if we used corporate and individual HTC savings to reduce the corporate tax rate over a 10 year period. If we use the Office of Management of the Budget’s (OMB) projections, we would see a reduction in the top corporate tax rate of 0.14 percent (from 35 percent to 34.86 percent). What if we used all of those savings for the individual rate instead? For the individual rate, over 10 years we would see a 0.03 percent reduction (from 39.6 percent to 39.57 percent). These are not very significant numbers.

The most politically realistic repeal scenario would be that savings from the individual credit would be used to reduce the individual rate and the corporate savings would reduce the corporate rate. What does that scenario look like?

Over 10 years, the top corporate tax rate would average out at 34.87 percent over 10 years, resulting in a 0.13 percent savings. The top income rate over 10 years would see less than 0.01 percent change. More details here.

These small savings clearly don’t justify the repeal of a very successful program, especially when you take into account the fact that the HTC actually more than pays for itself. The HTC has produced nearly $26 billion in federal tax receipts at the cost of $20.5 billion in credits. While tax reform is important, lawmakers looking to eliminate tax expenditures should look elsewhere.