JCT, Treasury Differ on Costs of President’s Tax Credit Proposals

Published by Michael Novogradac on Friday, May 2, 2014 - 12:00am

The Joint Committee on Taxation (JCT) recently released estimates of the costs of President Obama’s fiscal year 2015 budget proposals, including proposals to reform the low-income housing tax credit (LIHTC), the new markets tax credit (NMTC) and the renewable energy production tax credit (PTC). The JCT’s estimates are used by Congress to inform their decisions. Because the PTC and NMTC would require congressional action to be extended, the JCT’s cost estimates are particularly significant.

Treasury’s and the JCT’s methodologies differ in a few ways, and as a result, the JCT’s estimates differ in many areas from the estimates provided by the Treasury Department in its Greenbook.

The JCT estimates that between 2014 and 2019, President Obama’s proposals to extend and modify the NMTC will reduce federal revenues $1.2 billion, while the Treasury estimates that the proposals will reduce federal revenues by almost $2 billion. Treasury estimates that extending and modifying the NMTC will cause revenues to fall approximately $751 million, or 62.3 percent, more than the JCT does. When the JCT looked at a longer time frame, 2014 to 2024, it estimated that the NMTC extension would reduce federal revenues by $7.1 billion. On the other hand, the Treasury Department estimates President Obama’s NMTC proposals will reduce federal revenues by about $1.7 billion, or 23.6 percent, more than the JCT does for a loss of revenue of about $8.7 billion over 10 years.

There are a few potential explanations for why the estimates differ. Treasury assumes a much faster ramp up rate, which pushes up the costs of the credit sooner. This may be why the gap narrows as the estimates approach 2024. JCT’s estimate of GDP growth is lower than Treasury’s, which could explain why the JCT assumes slower take up of the NMTC allocation.

 

Blog Chart Estimated Budget Effects of Proposal to Extend and Modify the New Markets Tax Credit
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President Obama proposed several provisions to revise the LIHTC, including allowing states to convert private activity volume cap into LIHTCs that the state can allocate; changing the formulas for the 70 percent present value and 30 percent present value LIHTC; and requiring that LIHTC supported housing protect victims of domestic abuse. For the period between 2014 and 2019, the JCT estimates that these LIHTC proposals will reduce federal revenues by $385 million, while Treasury estimates that the proposals will reduce federal revenues by $464 million. For the period between 2014 and 2029, the JCT estimates that the LIHTC proposals will reduce federal revenue by about $2 billion, while the Treasury Department estimates that the proposals will reduce federal revenue by about $1.39 billion. The JCT estimate of the revenue impact of these provisions between 2014 and 2024 is $615 million, or about 44 percent, larger than Treasury’s estimate.

The largest source of the difference between the JTC and Treasury estimates is the JCT estimate for the conversion of private activity bonds into LIHTCs. This is expected–it is difficult to predict exactly how many credits would actually be allocated, because that is contingent on a variety of economic factors. The JCT thinks this will cost double what Treasury believes.

The second largest gap is based on the proposal to encourage mixed-income occupancy. Treasury actually doesn’t publish any cost estimates, expecting the estimated revenue effects to be less than $50 million. This, too, is difficult to predict, as it requires guessing about the proportion of LIHTC-supported developments that elect the criterion employing a restriction on average income.

 

Blog Chart Estimated Budget Effects of Proposal to Extend and Modify the Low-Income Housing Tax Credit
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Finally, the JCT estimates that President Obama’s proposals to extend and modify the PTC will reduce federal revenues by $2.6 billion between 2014 and 2019. The Treasury Department estimates that those provisions will reduce federal revenues by $4.3 billion between 2014 and 2019. When the JCT examined the longer time frame of 2014 and 2024, it estimated that that the PTC extension would reduce federal revenues by about $21.7 billion. Treasury, examining the same time frame, estimated that the PTC extension would cost about $19.3 billion. The JCT projects the president’s proposals to modify and extend the PTC will reduce federal revenues by about $2.4 billion, or 12.5 percent, more than Treasury does.

Interestingly, the JCT actually assumes a positive revenue benefit for the PTC extension in the first few years. This is probably because the extension of the PTC means that projects that are currently rushing to claim the credit before their eligibility expires can slow down. This would push their tax credit claims further out into the future. The JCT’s overall higher estimates for PTC costs might be because they project higher demand for wind power in the future than Treasury does.

 

Blog Chart Estimated Budget Effects of Proposal to Modify and Permanently Extend the Renewable Electricity Production Tax Credit
Click to Enlarge

 

Overall, the JCT estimates that the president’s suggested changes to the LIHTC and PTC will be more costly than the Treasury Department does, while the changes to the NMTC will be less costly. Because Congress relies on the JCT estimates to inform their economic decision making, the higher cost estimates could mean some of the president’s proposals have a slightly steeper climb to gain approval than was originally projected, while others face a slightly less steep climb.

If you have other explanations and ideas regarding the differences between the JCT and president’s estimates, please share them in the comment section.