Is 2020 the Year to Pass Infrastructure Legislation that Includes Community Development Tax Incentives?

Published by Michael Novogradac on Monday, March 2, 2020
Journal cover thumb March 2020

President Donald J. Trump’s fiscal year 2021 budget proposal, once again, asks for more infrastructure spending.

This request comes amid a variety of competing infrastructure plans being discussed in Congress. The big question is whether this year will be different, and see enactment of a major infrastructure spending bill.

The one word equivocal answer: maybe.

This year is a presidential election year and many believe that major legislation such as infrastructure spending can’t pass in such a year. Contrary to popular belief, notable legislation can pass Congress and be enacted in presidential election years. We previously discussed in this column how notable tax legislation does pass in election years. In fact, in 10 of the past 11 presidential election years, significant tax legislation was enacted.

If infrastructure spending legislation passed this year, such a bill would be an excellent vehicle to expand funding–including tax incentives–for affordable housing, community development and historic preservation.

This means the affordable housing, community development and historic preservation communities need to be ready. If the parties can find common ground on infrastructure legislation, many existing proposals involving the low-income housing tax credit (LIHTC), new markets tax credit (NMTC) and historic tax credit (HTC) could be enacted this year. Such legislation could also include a new funding tool: infrastructure tax credits.

What’s New in 2020?

In an increasingly fractured political world, infrastructure spending remains rare common ground–even though there is disagreement on what “infrastructure” includes and how to pay for it.

Infrastructure was a talking point in February when President Trump released his proposed budget for fiscal year 2021. Trump’s budget included spending $1 trillion on infrastructure over the next decade, an increase from $200 billion in previous budget requests. While Trump’s budget plan is just a starting point in negotiations, it highlights that Republicans are interested in investing in America’s infrastructure.

Democrats made their interest clear shortly before Trump’s budget request when the Democrat-controlled House Ways and Means Committee held an infrastructure hearing and released its own plan.

Trump: $1 Trillion Proposal

Trump’s budget proposal for FY 2021 calls for $1 trillion in direct federal investment in infrastructure over 10 years–including an $810 billion, 10-year reauthorization of surface transportation programs and $190 billion in investment in other infrastructure sectors. The amount is a fivefold increase in direct federal spending over a similar proposal two years earlier–a proposal that relied on the federal spending to spur additional funds from states, local government and the private sector. The 2018 proposal did not include a definitive proposal to reauthorize surface transportation programs.

Trump has emphasized the need for infrastructure improvement since his 2016 campaign for president. While on the campaign trail that year, Trump’s representatives proposed a federal infrastructure tax credit that would involve $137 billion in credits to generate enough investment for $1 trillion in infrastructure. In 2018, he unveiled his $200 billion infrastructure plan and this year he bumped it up to $1 trillion.

Trump has signaled that he wants infrastructure spending and Democrats in the House of Representatives agree. … To a certain extent.

Democrats: $760 Billion Proposal

House Democrats advanced an infrastructure plan at the late-January House Ways and Means Committee hearing, releasing a five-year, $760 billion infrastructure framework called, “Moving Forward,” that included proposals to expand the LIHTC, NMTC and HTC. The spending in the framework actually exceeds $760 billion, as the proposal includes increases in LIHTC, NMTC and HTC funding, but doesn’t state a dollar amount of the increases.

The Democrats’ plan includes $329 billion for highways and $86 billion for broadband, a target rarely included in transportation-focused bills. House Democrats didn’t release their complete plan–just a framework and fact sheet. Like Trump, there wasn’t an explanation of how they would pay for the investment.

Infrastructure Funding Now

The Highway Trust Fund is the principal way the federal government has paid for much of traditional infrastructure–primarily transportation. The Highway Trust Fund has two accounts, each of which funds specific programs. The problem? Since fiscal year 2008, the federal government has transferred general fund money to the Highway Trust Fund to make ends meet–more than $140 billion over that time.

The funding pinch is why Trump and the Democrats each look at infrastructure spending. The nonpartisan Joint Committee on Taxation (JCT) also weighed in on the idea.

JCT Report on Infrastructure

The JCT report released ahead of the January Ways and Means Committee hearing considered the use of private activity bonds (PABs) and tax incentives to fund infrastructure projects.

The JCT report pointed out that the NMTC already funds infrastructure, with nearly $2 billion of the $48.3 billion in NMTCs invested in the history of the incentive going to infrastructure. The JCT report included a list of 171 NMTC-financed infrastructure projects, with 55 (for a total of $679 million investment) in electric power generation, transmission and distribution; and 45 (worth $557 million investment) for parking.

PABs received significant mention as a possibility for infrastructure spending in the JCT report, primarily because many of the permitted purposes of PABs are infrastructure-related. Interestingly, the report’s list of covered activities included qualified residential rental projects, which are apartment often paired with 4 percent LIHTCs.

The JCT report also mentioned the LIHTC and HTC as routes to “housing infrastructure,” without further comment.

Infrastructure Tax Credits

An enacted infrastructure spending plan could also include a new tool: infrastructure tax credits.

Legislation first introduced in 2015 would fund infrastructure with tax credits. That’s when Sens. Ron Wyden, D-Ore., and John Hoeven, R-N.D., introduced the Move America Act, which sought to create more tax-exempt bonds to be used for infrastructure projects and included tax credits for infrastructure projects.

Two years later, the Move America Act of 2017 was introduced in both the House and Senate. That bill would have expanded PABs, created Move American Bonds and created Move America Tax Credits, which would allow smaller states to trade in some or all of their bond allocation for tax credits at a 25 percent rate.

In 2019, the Move America Act of 2019 was introduced in both houses of Congress. Again, the legislation would create bonds, with smaller states having the option to trade in some or all of their bond allocation at a 25 percent rate.

The benefit of an infrastructure tax credits includes the fact that they allow significant financial investment from third-party investors, the ability to screen projects before development by those investors, the spreading of the risk of construction by having that risk carried by investors and developers, and the tax credits are received over time, requiring performance. Credits would also be subject recapture in the event of failure and credits would provide the ability for local- or state-level oversight and allocation and regulatory guidance and oversight by the IRS.

If those benefits seem familiar, it’s because they are.

Those also come from the LIHTC, NMTC and HTC.

What Kind of Deal is Possible?

While the odds of passage of a major infrastructure bill in 2020 are not great, it is possible. One reason is the pending expiration of existing funding.

The Fixing America’s Surface Transportation (FAST) Act of 2015 expires Sept. 30. A reauthorization bill advanced in the Senate and continued funding for the legislation was included in the House infrastructure proposal. At his State of the Union speech, Trump called on Congress to pass the Senate version, although in his budget proposal, he put forward a plan for a 10-year, $810 billion reauthorization. The Congressional proposals are very different in their cost (the Senate bill is for $287 billion, the House proposal is for the aforementioned $760 billion), but an extension of the FAST Act could provide a chance for broader infrastructure legislation.

The pessimistic view: Democrats hold the majority in the House, so they could advance an infrastructure plan along party-line votes, but the Republican-controlled Senate is unlikely to embrace a proposal that didn’t get GOP support in the House. Trump and the Republicans can advocate their own legislation, but must win over Democrats skeptical of a purely private-sector-led approach.

The optimistic view: Republicans and Democrats both seem to support infrastructure, albeit in different ways.

Both parties face a crucial hurdle in their infrastructure plans–identifying how to pay for any investment. As such, the tax-writing Senate Finance Committee and House Ways and Means Committee will play a key role in whether any infrastructure legislation advances–providing an opportunity for proponents for the LIHTC, NMTC, HTC and Move America Act to push for provisions to be included in legislation.

Supporters of the LIHTC, NMTC and HTC should be ready to advocate for the inclusion of those incentives in any infrastructure bill that advances. In a serendipitous twist of language, a transportation issue could be the vehicle for affordable housing, community development and historic preservation tax incentives.

Even if major infrastructure financing can’t pass in 2020, the momentum toward 2021 and beyond is important. Infrastructure is a rare issue with bipartisan importance, so infrastructure remains a logical tool for tax incentives that already have bipartisan support.