Tax Reform Could Leave LIHTC, NMTC, HTC and RETCs Untouched Yet Still Have Dramatic Effects

Published by Michael Novogradac on Tuesday, December 6, 2016 - 12:00am

Reports indicate that President-elect Donald Trump and House Republicans plan to aggressively pursue tax reform in early 2017. It’s too soon to say what the tax reform might mean for specific tax provisions, such as the low-income housing tax credit (LIHTC), new markets tax credit (NMTC), historic preservation tax credit (HTC) and renewable energy tax credits. But, it’s important to note that even if these tax credits are left intact, Congress and the president could consider a number of other changes that would have significant implications for the future of investment affordable rental housing, community development, historic preservation and renewable energy.

These columns, originally published in 2012 and 2013, considered those implications. With a Republican president, and the House Republican tax reform taskforce blueprint, tax reform has gained significant momentum.  The domino effects of tax reform are beginning to be more widely discussed and assessed.

Domino Effects

For example, if the top marginal corporate income tax rate is lowered, it would likely have different effects on different tax credits; for the NMTC it would likely be a net positive but for the LIHTC it could have a net negative effect. Yields for some HTC investments will increase, but for HTC investments that involve a pass-through lease structure, HTC yields would drop.

Renewable energy ITCs have a more modest 50 percent basis reduction. This means that if the top tax rate is lowered, yields for some ITC investments will be affected, though only slightly. However, for ITC investments that involve a pass-through lease structure, yields would drop modestly.

Novogradac’s 2013 analysis suggests that if the amount of investor equity is held constant, lower top corporate tax rates and extended depreciation periods lower LIHTC yields, therefore creating downward pressure on LIHTC investor equity pricing. For the equity market as a whole, this could mean a loss of $220 million to nearly $1 billion dollars, or more, in equity used to finance affordable rental housing.

Novogradac is updating this analysis and modeling the effect of the House GOP tax reform blueprint on LIHTC equity. It’s important to note that the blueprint contains provisions that could increase LIHTC equity, such as more rapid expensing, as well as negative ones, such as limiting interest deductions.  Furthermore, it’s quite possible that in the context of tax reform, Congress will consider provisions that would enable to the affordable housing community to produce at least as much affordable housing under a reformed code as it did before tax reform.

Transition Rules 

Key to the implementation of any changes imposed by tax reform will be the transition rules that are passed as part of the enacting legislation. This will be especially true for changes that will result in an adverse effect. The Tax Reform Act of 1986 included transition rules over two to four years and the tax reform bills proposed by then-House Ways & Means Chairman Dave Camp included transition rules over five years.

Stay Tuned

Beyond changes to tax credits themselves, tax reform proposals that take shape in the coming months will factor significantly into the outlook for affordable housing, community development, historic preservation and renewable energy. And as the LIHTC, NMTC, HTC and renewable energy tax credit communities work to protect the important benefits these tax credits generate, they should keep an eye on the big picture to avoid needless adverse impacts