Even With Recent Increases in Renewable and Clean Energy Tax Incentives, Far Less is Spent on Community Development Tax Expenditures than Other Notable Tax Expenditures
As in years past, the tax expenditure estimates released by the Joint Committee on Taxation (JCT) show that affordable housing and community development tax incentives cost far less than other tax expenditures. The Estimates of Federal Tax Expenditures for Fiscal Years 2022-2026, released by the JCT Dec. 22, 2023, reports that the low-income housing tax credit (LIHTC), historic tax credit (HTC), renewable energy production tax credit (PTC) and investment tax credit (ITC), new markets tax credit (NMTC) and the opportunity zones (OZ) incentive are far less costly to the federal government in terms of forgone tax revenue than many other corporate and individual tax expenditures.
Estimate reports are prepared by the JCT for the House Ways and Means Committee and the Senate Finance Committee. Each report typically considers federal tax provisions enacted through summer of the release year–for instance, the 2018 report estimates included tax changes brought about by the tax reform included in the Tax Cuts and Jobs Act of 2017. This recent JCT release considers legislation enacted through Aug. 16, 2022. Since the numerous clean and renewable energy provisions provided by the Inflation Reduction Act (IRA) of 2022 were enacted the same day, and the tax expenditure estimates for the PTC and ITC are actually decreased, the JCT five year estimates may not include the impact of IRA provisions. Another factor to consider when looking at the surprisingly low ITC and PTC JCT tax expenditure estimates is that there may be separate estimates for the technology neutral PTC and ITC that begin Jan. 1, 2025. It should be noted, the Aug. 9, 2022, JCT estimate of the cost of IRA’s combined technology-specific and technology-neutral ITC and PTC provisions was $23.5 billion more than prior law over 2022-2026. The 2020 JCT estimate of the combined PTC and ITC tax expenditure cost under current law was $52.5 billion over 2020-2024, while this more recent JCT estimate is $48.8 billion over 2022-2026.
LIHTC, NMTC, HTC, OZ and RETC tax expenditures cost just a fraction of other popular corporate and individual tax expenditures
The 10 largest individual tax expenditures, provided below, cost the federal government nearly 10 times as much as the 10 largest corporate tax expenditures. It should be noted that the description of corporate indicates the tax expenditures that were primarily or exclusively claimed by corporations; likewise, individual indicates the tax expenditures that were primarily or exclusively claimed by individuals.
The three largest corporate tax expenditures are nearly double the remaining seven expenditures. Several community development and renewable energy tax expenditures are included among the 10 largest corporate tax expenditures, but they are overshadowed by other larger expenditures.
The community development and renewable energy tax expenditures shown below provides a counterpoint to the corporate and individual tax expenditures tables.
The housing, community development, historic preservation, and renewable and clean energy incentives continue to provide benefits that outweigh their costs. With recession fears, record levels of inflation and the continuing threat to the economy the ongoing COVID-19 pandemic presents, supporting the LIHTC, NMTC, OZ incentive, HTC, ITC and PTC are crucial.
The LIHTC has long been the leading finance tool for the creation and rehabilitation of affordable rental housing in the United States. Since its inception, more than 3.6 million affordable rental homes have been created or rehabbed using the incentive. In addition to the LIHTC, accelerated depreciation for rental housing and tax-exempt multifamily housing bonds both provide benefits in terms of support of rental housing development that outweigh their estimated cost.
Among the tax expenditure estimates included in the JCT report, those devoted to community development are among the expenditures whose public benefits far outweigh their cost. For every $1 invested in the NMTC, it generates more than $8 of private investment, per the CDFI Fund. The NMTC remains a crucial incentive for development in underserved communities. Further, research shows the projects using NMTCs generated nearly 53,000 jobs in 2021 (the most recent estimate available). As legislators consider permanence for the NMTC–the incentive is authorized through 2025–the outsized benefits generated through the incentive relative to its cost speaks to its importance.
Similarly, the OZ incentive, designed to direct private investment to low-income communities, is another “low-cost” tool that can aid in ongoing economic recovery and, in light of stubbornly high inflation rates, bring aid to those areas that are more negatively affected. The latest update to Novogradac’s fund manager survey shows participating qualified opportunity funds (QOFs) have raised $32.7 billion in equity, a 7.2% increase from the second to third quarter of 2022. It should be noted that total investment in QOFs is likely three to four times greater than the $32.7 billion reported by survey participants, meaning upwards of $100 billion could be directed toward communities traditionally left behind.
Annual reporting provided by the National Parks Service on the HTC shows that since its inception through FY 2021, more than 3 million jobs have been generated and $199.1 billion in total rehabilitation investment has been leveraged. Further, more than $60 billion in federal, state and local taxes have been generated by the HTC. In particular, the cost of the $37.6 billion in federal HTCs claimed through FY 2021 is more than offset by the $42.9 billion in additional federal taxes generated, according to the NPS Report.
The extension of the ITC and PTC included in the IRA provides needed certainty to investors, which will ensure the benefits realized by these incentives continue. SEIA, the Solar Energy Industries Association, credits the ITC with supporting growth in the solar industry. Since the ITC’s inception in 2006, SEIA reports more than 255,000 solar jobs have been created, $140 billion has been invested in the U.S. economy, solar deployment has increased by more than 10,000% and the industry has grown by an average annual rate of 52% each year. The American Clean Power Association (ACP), which works to advance clean energy sources, reports similar benefits associated with the PTC and ITC. Nearly 443,000 clean energy jobs have been created and costs associated with wind and solar have decreased by 70% and 90%, respectively. Prior to the creation of the energy tax credits, the amount of the country’s electricity delivered by clean energy was negligible–in 2020 wind and solar power delivered 11% of the country’s electricity.
Among housing tax expenditures, rental expenditures are one-third of those for homeownership
Taking a closer look at housing tax expenditures shows that, as in years past, the five-year estimate for homeownership tax expenditures far exceeds those for rental tax expenditures. In the 2022-2026 estimate, homeownership tax expenditures are projected to be more than five times rental tax expenditures. In this recent release, the deduction for property taxes on real property, estimated to cost the federal government $113.1 billion over 2022-2026, is double the $56.9 billion estimated for 2020-2024. Due to changes in reporting–post 2017 tax reform, the JCT stopped reporting the deduction for property taxes on real property as a separate tax expenditure estimate–Novogradac has been calculating the estimate for this tax expenditure, taking the percentage of property tax deductions to overall deduction of state and local government taxes seen prior to the passage of the Tax Cuts and Jobs Act (TCJA) and applying it to current JCT tax expenditures of state and local deductions. Novogradac acknowledges the estimate of $113.1 billion likely underrepresents the actual property tax deductions taken. This estimated increase for the property tax deduction is likely a result of the annual $10,000 cap on state and local tax deduction expiring in 2025.
The size of the mortgage interest deduction, also impacted by the TCJA, is estimated to rebound, though the cost will not be as high as the estimate for 2016-2020, which was $357 billion. Similar to the dynamics for the property tax deduction, this is likely due to the fact that the 2017 change in the size of the mortgage from which mortgage interest could be deducted from $1 million to $750,000 is scheduled to expire in 2025.
Trends in Itemized Deductions
Since the passage of the TCJA, certain itemized deductions, which as a group had typically been among the largest government revenue tax expenditure costs, have seen significant decreases as a result of tax changes ushered in by that legislation. While this most recent JCT release reports pretty significant increases for what are traditionally the largest itemized deductions, particularly deductions for both nonbusiness state and local government taxes and for mortgage interest on owner-occupied residences, the costs of these deductions are still well below the pre-TCJA estimates for 2016-2020. In addition to the effect of TCJA changes on itemized deductions, the JCT estimates also consider the impacts of COVID-19-related relief legislation, the most significant being the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020.
The expiration of the annual $10,000 cap on the deduction of state and local taxes in 2025 explains the significant increase in that deduction in this latest estimate. Still, the cost of this deduction has not reached pre-TCJA levels–the five-year estimate for 2016-2020 was $368.8 billion.
Outlook for 2023
As there was not a significant tax title in the fiscal year 2023 omnibus spending bill enacted late last year, there will likely be an attempt in Congress over the next two years to address tax legislation, including tax extenders and other tax proposals, that were left unaddressed in last year’s year-end legislating. The negligible cost of the LIHTC, NMTC, HTC, OZs, ITC and PTC compared to the benefits highlighted above provides for a favorable cost-benefit analysis that can be referenced by supporters when advocating for extensions and enhancements to affordable housing, community development and clean energy tax incentives.
