How Would Camp Tax Reform Discussion Draft Alter the Low-Income Housing Tax Credit?

Published by Michael Novogradac on Thursday, February 27, 2014 - 12:00am

On Feb. 26, House Ways & Means Committee Chairman David Camp (R-Mich.) released a 979-page discussion draft and section-by-section summary of legislation to reform the Internal Revenue Code of 1986.  Unlike almost all other business tax credits, Camp’s discussion draft would retain the low income housing tax credit (LIHTC).  This is a tremendous achievement for advocates of affordable rental housing.

However, the discussion draft would also significantly modify the LIHTC in ways that would dramatically affect how it operates.  Furthermore, it would repeal the historic rehabilitation tax credit (HTC) and the renewable energy investment tax credit (ITC) and production tax credit (PTC).  The discussion draft does not mention the new markets tax credit (NMTC).  However, as the NMTC has expired, and the discussion draft comprehensively addresses the entire current Code, the omission means that Camp proposes to allow the NMTC to remain expired.  Indeed, another expired corporate tax credit, the research & development tax credit, is explicitly made permanent in the discussion draft.

We cannot emphasize enough that this proposal is only a discussion draft and is intended to elicit feedback from a variety of constituencies, which it most certainly will.

According to the section-by-section summary, Congressional Joint Committee on Taxation (JCT) technical summary, and our interpretation of the proposed statutory language, the discussion draft would modify the LIHTC in the following ways:

  • The 30 percent present value (“4 percent”) LIHTC would be repealed. The discussion draft also repeals tax-exempt private activity bonds by making interest on bonds issued after 2014 taxable, including multifamily rental revenue bonds.  As such, both 4 percent tax credits for acquisition costs and for tax-exempt bond financed projects would no longer be available to help finance rent restricted rental housing.
  • The basis boost for qualified census tracts and difficult development areas would be repealed. The combination of the elimination of the 4% credit for acquisition costs and the repeal of the 30% basis boost would likely lead to more projects receiving LIHTC allocations and more units receiving LIHTC support.  However, the change also likely means housing developments would find it far more difficult to serve extremely low income families and to provide supportive services.
  • The national pool of unused LIHTC would be eliminated. Any states not allocating LIHTC authority to projects within two years would lose them.
  • The “floating rate” for 70 percent present value (“9 percent”) LIHTC would be retained.
  • Minimum 9 percent rate floor would remain expired. 
  • The credit period would be extended from 10 years to 15 years to match the 15-year compliance period.  The combination of the retention of the 70 percent present value floating rate and the extension of the credit period, means the annual credit percentage would decline, but the total credits a particular project would qualify for would be higher.

Our initial estimates are that the current floating rate of 7.60% would fall to 5.32% under the proposal, but over the 15 year credit period, total credits would rise to 80% from 76% of qualified basis.

  • Tax credit recapture rules would be repealed, as the credit and compliance periods would be concurrent.
  • States would no longer allocate credits, but instead allocate qualified basis, which would be calculated to be $31.20 multiplied by the state’s population, with a minimum annual amount of $36,300,000.  The annual amount would continue to include unused basis allocations from the prior year plus basis allocations returned to the state during the calendar year from previous allocations.

The $31.20 in annual qualified basis over a 15 year credit period is intended to approximate the present value equivalent of 2014’s $2.30 in annual credits over a 10 year credit period.

There has been some confusion among initial commentators regarding federally funded grants.  The language currently in the code, as amended by the Housing & Economic Recovery Act of 2008 (HERA), is retained.  As such, the eligible basis of a building would continue to not include any costs financed with the proceeds of a federally funded grant.

The Camp draft also made changes to two provisions enacted by HERA:

  1. The exception to the general public-use requirement would be revised to eliminate the protection for members of specific groups under certain Federal or State programs and individuals involved in artistic and literary activities.  Instead, the general public use exception for individuals with special needs would be retained and the draft would create a new exception for veterans.
  2. The requirement that states include in their LIHTC allocation selection criteria the energy efficiency of the project and the historic nature of the project would be repealed.
  • The requirement for New York and Illinois to suballocate LIHTC to New York City and Chicago would be repealed.

These LIHTC modifications would be effective for calendar years after 2014. A transition rule would translate credit allocations made before 2015 into equivalent amounts of eligible basis for purposes of determining new allocations of basis after 2014.

According to the JCT, all of these LIHTC changes would save $10.7 billion over 10 years. These savings principally relate to the extension of the credit period from ten to fifteen years. Camp’s summary also quotes JCT as estimating the discussion draft:

 “would increase the amount of LIHTC-financed projects by more than 5 percent in 2015 (from $9.3 billion to $9.8 billion).” 

 We are currently unclear as to the assumptions and analysis that support this JCT estimate.

The discussion draft also makes a number of other proposals that affect housing:

  • State & local deductions, including property taxes, for individuals would be repealed.
  • The amount of deductible home mortgage interest would be reduced to $500,000 from $1,000,000, phased in over four years.  Interest paid on home equity lines of credit would no longer be deductible.
  • It should also be noted that the Camp discussion draft substantially raised the standard deduction to $22,000.  Such an increase will, according to Camp, lead to 95 percent of tax filers using the standard deduction and only 5 percent to itemize deductions.
  • Modified accelerated cost recovery system would be repealed and rules substantially similar to the alternative depreciation system would apply to depreciable property.  The depreciable life for residential rental property would be extended from 27.5 to 40 years.  However, a provision would also increase annual depreciation deductions for inflation.

In addition to repealing the HTC and allowing the NMTC to remain expired, the discussion draft proposes to affect other community development related tax provisions:

  • The brownfields tax credit would be repealed,
  • The work opportunity tax credit would be repealed, and
  • The Empowerment Zone/Enterprise Community related tax provisions would remain expired.

It’s uncertain to what extent Camp will further revise his discussion draft, officially introduce the draft as a bill, or bring the legislation up for committee consideration.  However, no matter what happens to the discussion draft, given the significant difference in tax policy priorities between the political parties as well as Congress and the Administration, most tax policy experts do not expect comprehensive tax reform to be enacted in 2014.

Shortly before Camp released his discussion draft, House Speaker John Boehner (R-Ohio) would not commit the House to vote on Camp’s bill this year and noted House Republicans are still reviewing Camp’s draft.

On Feb. 25, Senate Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) both stated they did not expect Congress to pass comprehensive tax reform this year.  Recently, Senate Finance Committee Chairman Ron Wyden stated his desire to focus on address expired and expiring tax provisions, more commonly known as “tax extenders,” first before addressing comprehensive tax reform.

Novogradac & Co. will continue to analyze Camp’s discussion draft for other effects.  In the interim, please share your thoughts and post your questions on the discussion draft.