LIHTC: Breaking the Corporate Tax Expenditure Shackle

Published by Michael Novogradac on Wednesday, May 18, 2011 - 12:00am

Yesterday, Treasury Secretary Geithner reaffirmed President Obama’s hope to push corporate tax reform before the 2012 presidential election. A few weeks ago, HUD Secretary Donovan juxtaposed Tax Reform and the Low-Income Housing Tax Credit. In that speech, Secretary Donovan inaccurately said that the Low-Income Housing Tax Credit is the 3rd largest corporate deduction. It appears that the LIHTC is beginning to be shackled by the corporate tax expenditure label.

With this as background, I make the following factual observations about the LIHTC.  Observations that policy makers should be made aware of (and more importantly should consider) as they weigh the relative merits of various tax expenditures and corporate tax rates.  Observations that can help break the shackle of the corporate tax expenditure label.

1. Not all Corporate Tax Expenditures Are Alike.

The LIHTC is a purchased tax benefit, and substantially all of the net economic benefit of the LIHTC goes to low-income families, not to corporations.  The LIHTC, by being a purchased tax benefit, should be distinguished from other tax expenditures. Repeal of the LIHTC would have only a modest economic impact on corporations, BUT would have a dramatic impact on low-income families.  Over five years, over 400,000 low-income families would be adversely affected. 

Note also that the LIHTC is considered, in large measure, a corporate tax expenditure because the LIHTC community has done such an excellent good job of increasing the efficiency of the LIHTC by seeking large dollar investments from large corporations. The LIHTC could be marketed as it once was to individual investors in smaller increments.  This would move the LIHTC to the individual side of the tax expenditure ledger.  Such a move, however, would lead to less net capital for acquisition, rehabilitation and development of affordable rental housing.

2. Prospective Repeal of the LIHTC would only lower the top corporate tax rate by no more than 0.1%, from 35% to 34.9% in the first year.

Repeal of the LIHTC would contribute very little to the goal of lowering the top corporate income tax rate. 

3. The LIHTC is the 7th Largest Corporate Tax Expenditure (not number 3).

The LIHTC is a significant corporate tax expenditure and it is among the top ten, but let’s not exaggerate where it stands among the top ten. The fact is that the LIHTC is not number one, not in the top three and not in the top five.  It is number 7.

I also note that the cost of the top ten corporate tax expenditures is about $350 billion over five years. The top ten individual tax expenditures cost nearly ten times as much, at about $3.1 trillion over five years.