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The Buzz: Tornado Watch for Tax Credits?

Published by Benson F. Roberts on Wednesday, December 1, 2010

Journal cover December 2010   Download PDF

It’s a sunny day. The wind isn’t even blowing. But the atmosphere is unstable and a volatile weather system may be forming. It’s time for tax credit practitioners to get to the hardware store and supermarket, turn on the Weather Channel and get ready to hunker down. A tornado could be coming.

Consider these recent changes in the political weather.

First the President’s Economic Recovery Advisory Board, chaired by Paul Volcker, outlined tax reform options that identified major corporate tax incentives for possible termination, including the low income housing tax credit (LIHTC). The report did acknowledge the importance of the LIHTC to neighborhood revitalization, but it also cited critics who assert that housing vouchers might be a more cost-effective way to support low-income renters.

Then the two co-chairs of the President’s bipartisan deficit reduction commission – Erskine Bowles and Alan Simpson – outlined their plan for the commission’s consideration. It proposed a variety of tax reform approaches, all based on the idea of eliminating all or most tax incentives and using the savings to cut individual tax rates and reduce the deficit too. The outline did not mention the LIHTC, new markets tax credit, historic rehabilitation tax credit or renewable energy tax credits by name, but the principle is to wipe out everything and consider adding back only specific incentives if they are worth imposing higher individual tax rates. Even the mortgage interest deduction would be up for grabs.

Next, Rep. Dave Camp, the incoming chairman of the House Ways and Means Committee, declared that “America is at a crossroads, and the fundamental hope and promise of the American Dream is at stake,” calling for “fundamental tax reform that expands the base and lowers rates”.” He specifically targeted tax expenditures – “provisions that technically reduce someone’s tax liability, but in reality amount to spending through the tax code.” The chairman-in-waiting is a Washington realist. “I am well aware that this might ruffle those who have used the tax code to benefit particular industries or activities at the expense of economic efficiency, simplicity, and fairness. The tax code should collect the revenue the government needs as efficiently as possible. It should not be a tool of industrial policy.”

The following day, the Bipartisan Policy Center on Deficit Reduction and Tax Reform – this one chaired by Alice Rivlin and Pete Domenici – proposed a “radical simplification of the current tax code. In fact, to best explain it, forget what you know about the complexities of the current tax system, and start fresh.” It would retain a limited number of deductions and credits, but low-income housing, new markets, historic rehabilitation and renewable energy did not make the cut.

Get the picture?

Taken one at a time, most members of Congress support many of the targeted tax incentives. Talk to most law-makers about low-income housing or new markets or historic rehabilitation or renewable energy, and they probably will say the purpose is worthy and tax credit is effective. But they might consider sacrificing all of them for what might be seen as a greater good.
Most tax lobbyists inside the Beltway are not too worried. After all, tax reform is easy to support in theory but hard to enact. President George W. Bush commissioned a tax reform plan that was so roundly criticized that he never embraced it. The Bowles-Simpson outline met immediate hostility from both the left and right, and conventional wisdom says the co-chairs won’t even get the full commission to back them up. And tax reform was not even a big issue in the recent elections.

But complacency can be fatal. Back in 1986, most of the smart money at Gucci Gulch – the hallway outside the Ways and Means Committee room where tax lobbyists congregate – thought tax reform would never happen. Conventional wisdom changed very quickly then, and it could change quickly again in 2011.

As incoming Chairman Camp said his recent speech, “I recognize that progress in this direction will not be easy. But what Washington needs to understand is that the American people are demanding action, and, more importantly, they are demanding results.” He could well be right. Outside the Beltway, many voters would welcome a simpler tax code with lower rates. They mistrust the special interests and their lobbyists, and they think the federal government hasn’t managed the economy very well.

Frustration is building up inside Washington too. Every year Congress must scramble to find the money to extend the numerous temporary provisions that expire annually – now some 69 provisions by one count. Last year Congress could not get it done, new markets and its fellow orphans expired, and Congress is still trying to pass an “extenders” bill for retroactive effect. In most cases, it’s hard to argue that extending a tax incentive in late December can affect decisions made over the previous year – at least without time travel. And unless the extension covers 2011 as well as 2010, the extenders would expire again almost immediately. It’s not a happy situation.

So what should tax credit practitioners do to prepare?

The simple answer is to build support among members of Congress and the local community. Getting ready to start a project? Write to your representative and senators to thank them for making the opportunity possible. Visit with their district staff. Project completed and ready to open? Invite the representative and senators to the grand opening and schedule it for a Monday or Friday or during a district work period when members of Congress will be home. Invite the local newspaper and television crew too so the law-maker can take a bow and the public can learn too. Don’t forget to invite the mayor, the city councilman or county commissioner too. There is plenty of credit to go around and it doesn’t cost a dime.

Let everyone know which small businesses participated and how many jobs were created. Explain how tax credits create public-private partnerships in ways that other policies alone cannot. Best of all, let a low-income tenant or a new employee or a neighborhood leader tell what the project means to his or her family and community. This is not about the investors or developers or tax expenditures. It’s about people and neighborhoods and the local economy. And jobs, jobs, jobs.

Don’t put it off even if the weather seems fine. Start today and don’t stop. Because once a tornado gets going, it comes on fast and debris starts flying all over the place. It could be too late to get out of the way.

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