Update: LIHTC Repeal – Effect on Top Corporate Tax Rate

Published by Michael Novogradac on Friday, October 25, 2013 - 12:00am

Two years ago, we looked at what effect the repeal of the low-income housing tax credit (LIHTC) would have on the top corporate tax rate. With the government shutdown over, lawmakers in Washington have returned to the negotiating table to discuss broader budgetary issues, including corporate tax reform. In order to reduce the corporate tax rate and remain revenue neutral, lawmakers would have to repeal certain tax expenditures, such as the LIHTC. The LIHTC has created more than 2.4 million affordable rental homes since its inception in 1986, so a reduction of the corporate tax rate from an LIHTC repeal would have to be incredibly valuable to outweigh those benefits. In the debate over corporate tax reform, the Holy Grail for lawmakers continues to be lowering the top tax rate below 30 percent (from its current 35 percent rate). How close would repealing the LIHTC bring them to that goal? The answer is, again, not very.

A repeal of the LIHTC, on a prospective basis, would only reduce the tax rate, at most, 0.08 percent in the first year (down to 34.92 percent). Over five years, the average reduction would be, at most, 0.23 percent (to 34.77 percent) and over 10 years the reduction would only be, at most, 0.41 percent (to 34.59 percent). I say “at most” because these small reductions would in reality be even smaller—as these estimates are based on calculations that assume 100 percent savings in the first year, whereas given the combined construction and lease-up period associated with development of LIHTC properties, savings in the early years would be much less. The year one reduction would likely have close to no impact on the top corporate tax rate.

If the savings from the repeal of LIHTCs were entirely used to lower individual rates, the top rate of 39.6 percent would drop to about 39.54 percent after 10 years, a reduction of a mere 0.06 percent.

The LIHTC is an investable tax credit, the equity proceeds of which are used to benefit low-income families. This analysis shows that a prospective repeal of the LIHTC would provide only extremely modest reductions in the top corporate income tax rate, but it would come at a cost of nearly a million affordable rental units over 10 years.