Tax Credit Costs Remain Low Compared to Other Tax Expenditures
As Congress considers comprehensive tax reform, all tax expenditures are the under the microscope and possibly at risk because they may be repealed in favor of lower tax rates. However, not all tax expenditures have the same impact on the federal budget. The low-income housing tax credit (LIHTC) doesn’t rank among the 25 most expensive tax expenditures for the federal government, according to the Joint Committee on Taxation’s latest tax expenditure estimates. Other key tax credit programs are nowhere close.
While the LIHTC costs about the same as the combined cost of the new markets tax credit (NMTC), historic tax credit (HTC) and renewable energy production tax credit (PTC) and investment tax credit (ITC), it still falls well outside the most expensive programs in the government. That information is especially important when combined with the LIHTC’s crucial role in creating a much-needed resource of affordable rental housing.
The information comes from a JCT report that estimates the costs of more than 230 tax expenditures for fiscal years 2016-2020.
The cost of the LIHTC is pegged at $45.1 billion over the five-year period, with the total increasing slightly each year and concluding with a combined corporate and individual cost of $10 billion in the final year. For comparison sake, the LIHTC is just 5 percent of the cost of the single largest expense, the $863.1 billion price tag for individual taxpayers’ exclusion of employer contributions for health care, health insurance premiums and long-term care insurance premiums.
In fact, there are 20 different expenditures of more than $100 billion during the five-year period, including a laundry list that includes the income tax credit for having a child younger than 17 ($270.5 billion), the deferral of active income of controlled foreign corporations ($587.2 billion), the deduction for mortgage interest on owner-occupied residences ($357 billion), the deduction for property taxes on real property ($180 billion), and reduced rates of tax on dividends and long-term capital gains ($677.7 billion).
The assessment of the costs of various programs is critical in light of heightened attention to comprehensive tax reform. As Republicans in Congress speak about making the most sweeping changes to the tax code since the Tax Reform Act of 1986, they have been vague on the fate of tax credits, aside from a comment in their blueprint for tax reform published last year saying that tax reform “generally will eliminate special-interest deductions and credits in favor of providing lower tax rates.”
Of course, the LIHTC and HTC are currently an indefinite part of the tax code, while the NMTC is in the third of a five-year extension. The PTC is in the third year of a five-year phase-out, and the ITC will gradually phase down until it becomes 10 percent in for properties that begin construction in 2022 and later. What could happen to them in tax reform is an open question, but the JCT report gives ammunition to the tax credit supporters.
The fact that the programs provide significant benefits for affordable housing, community development, historic preservation and environmental protection are important, as is the associated financial benefit with the programs (for instance, the CDFI Fund estimates that $8 of private equity is invested for every $1 awarded in NMTCs and a Novogradac report demonstrated that the LIHTC generates more tax revenue than it costs; the LIHTC creates about 90,000 jobs annually; and not only has the HTC created more than 2.3 million jobs since 1977, Rutgers found that the HTC more than pays for itself by generating $28 billion in revenue while only costing $24 billion).
Ultimately, one of the key arguments for retaining the tax credits is simple: Cost-benefit analysis. When weighing the impact of the programs against their negligible cost in the grand scheme of tax expenditures, the elimination or reduction of the LIHTC, NMTC, HTC, ITC and PTC would have tremendous consequences with relatively little savings. An upcoming post in this space will examine how repealing these credits would affect top tax rates.