House Tax Reform Legislation Retains LIHTC, Repeals NMTC and HTC after 2017

Published by Michael Novogradac on Thursday, November 2, 2017 - 12:00am

Updated:2017-11-08 12:41 pm

Today the House Ways and Means Committee released tax reform legislation and summary documents, which is expected to be considered in committee starting Monday. The legislation was guided by the principles laid out in the Sept. 27 “Unified tax reform framework,” but crucially filled in key details on how those principles would be implemented.

Affordable Housing

As expected from the framework, the legislation explicitly retains the low-income housing tax credit (LIHTC), a tremendous achievement for the affordable housing community. The only other corporate tax credit the framework explicitly proposed to retain is the research and development credit. Unfortunately, the legislation repeals the tax exemption for private activity bonds, including multifamily tax-exempt bonds, which finance more than 40 percent of all LIHTC-financed affordable homes annually.

It should be noted that under a lowered corporate rate, the value of LIHTC is reduced. LIHTC stakeholders advocated for Congress to consider a proposal offsetting the effect of a lowered corporate rate and other code changes on LIHTC investment and production. Unfortunately, the proposal was not included in the legislation.

Historic Preservation and Community Development

Unfortunately, the legislation would explicitly repeal the new markets tax credit (NMTC), historic tax credit (HTC) and non-historic rehabilitation tax credit after 2017, a disappointing setback for community development and historic preservation, albeit not entirely unexpected. Under current law, NMTC is scheduled to expire in 2019.

The HTC and the NMTC don't have a large budgetary impact. In fact, the NMTC and HTC are a net positive for the economy. The National Park Service recently released the latest report on HTC from Rutgers University, which found that since its inception in 1978, the federal HTC has attracted $131 billion in private investment to the rehabilitation of 42,293 historic buildings, creating more than 2.4 million jobs and serving as a net-revenue generator for the U.S. Treasury: the $29.8 billion in federal taxes generated by HTC projects exceeds the $25.2 billion in credits allocated.

Renewable Energy

The bill would generally maintain the renewable energy investment tax credit (ITC) and production tax credit (PTC) current law  five-year phasedowns, but the bill would eliminate inflation adjuster and makes a change related to the continuous construction requirement. The legislation does extend “orphaned” RETC technologies at the current law ITC phasedown schedule.

Inflation factors

The legislation proposes to use an alternate measure of inflation for indexing tax brackets and other tax parameters, replacing the consumer price index (CPI) inflation factor with “chained CPI.” This would reduce future LIHTC allocations.

This summary highlights key components of the tax reform legislation:

LIHTC

  • Volume cap 9 and 4 percent LIHTC for acquisition are retained.
  • All tax-exempt private activity bonds, including multifamily are repealed
  • Four percent LIHTC generated by multifamily bonds are repealed.

NMTC

  • Legislation would repeal NMTC after 2017. Under current law, NMTC is scheduled to expire in 2019.

HTC

  • Legislation would repeal HTC and non-historic rehabilitation tax credit after 2017.

RETC

  • Legislation generally retains current law ITC and PTC phasedowns of the 30 percent ITC and PTC.
  • Permanent 10 percent credit for solar projects expires 12/31/27.
  • PTC will revert to its pre-inflation baseline number of 1.5 cents per kWh of electricity sold for projects that start construction after the bill is enacted. Previously 2.4 cents per kWh (37.5 percent decrease in credit).
  • “Orphaned” RETC technologies are extended at ITC phasedown schedule. This would include fuel cells, combined heat and power etc.

Business

  • Top corporate rate of 20 percent.
  • Pass-through rate of 25 percent for 30 percent of business income (the remaining 70 percent to be taxed at ordinary rates).
  • Immediate expensing of assets for new investments made after Sept. 27, 2017, for at least five years (not including buildings). (Real estate not qualifying activity.)
  • Deduction of interest expense for would be subject to a disallowance of a deduction for net interest expense in excess of 30 percent of the business’s adjusted taxable income. (Real estate not subject to limitation.)

General Real Estate

  • Not eligible for immediate expensing of assets.
  • Not subject to interest expense limitation.
  • 1031 “like-kind” exchanges are retained only for real property.

Individual

Individual rates of 12 percent, 25 percent 35 percent, and 39.6 percent.

  • Doubled standard deduction.
  • $1,600 child tax credit.
  • $300 credit for non-child dependents, expiring in 2023.
  • Individual alternative minimum tax (AMT) is repealed.
  • Municipal bond income tax exemption retained.
  • State and local property tax deduction retained, but capped at $10,000.
  • State and local income tax deduction repealed.
  • Mortgage interest deduction (MID) retained, but capped at $500,000 instead of $1.1 million.
  • Charitable giving deduction preserved, but both it and MID effectively limited by increased standard deduction and repealed deductions.
  • Most other itemized deductions are repealed.
  • Earned Income Tax Credit is retained.
  • Tax incentives for higher education are “streamlined.”
  • Estate tax exemption increased and then repealed after 2024.

International

  • Territorial international tax system with repatriation tax rates for accumulated liquid and illiquid assets.
  • Global minimum tax of 10 percent.
  • Base erosion rules to protect the tax base.

Other

  • Inflation factors in tax code changed to “chained” CPI.

Transition Rules

  • Details are forthcoming

Next Steps

The release of tax reform legislation triggers a lightning pace of congressional deliberation on tax reform. It also reveals what tax benefits would be curtailed in addition to the ones it would provide, underscoring the difficulty of getting tax reform through Congress. The longer Congress considers tax reform, the more pressure it will receive to add back tax provisions repealed or make other changes to lessen the impact of provisions to offset the cost of tax rate cuts and other tax benefits.

The Ways and Means Committee is expected to start considering tax reform Monday. The meeting is scheduled to last more than one day to accommodate member statements, amendments considered and voted, and then the vote to report the bill to the full House. If the Ways and Means Committee approves tax reform legislation as anticipated, the full House is expected to consider the bill the week of Nov. 13.

Meanwhile the Senate Finance Committee is also expected to consider its version of tax reform legislation the week of Nov. 13. The Senate version is expected to have notable changes to the House version, likely being more “moderate” on several tax provisions and policy than the House bill. For instance, the Senate may not have the votes for full repeal of the estate tax. Full repeal costs $269 billion over 10 years. We also expect the Senate bill to be more conducive to affordable housing, community development, and renewable energy.

If the Senate committee approves the bill the week of Nov. 13, Senate Majority Whip John Cornyn, R-Texas, said he expects the full Senate to consider the bill before Thanksgiving.

If this time frame holds, that would leave December for the House and Senate to reconcile differences between the bills, and significant differences are expected. The goal would be to send a final tax reform bill to the president by the end of the calendar year.

Given the difficulties of tax reform, it will extremely hard for Congress to maintain this schedule, and it may slip to 2018. However, Congress is also under extreme pressure to pass tax reform and community development tax credit advocates should take the aggressive schedule seriously.

It’s crunch time; strap in for the bumpy road ahead.