Coming Tax Legislation Could Bring New Community Development Tax Incentives

Published by Michael Novogradac on Monday, November 2, 2020
Journal Cover Thumb November 2020

(Editor’s note: This is an excerpt and expansion of content from “Blue Wave Effects: What a Democratic Sweep Could Mean for Affordable Housing, Community Development, Renewable Energy and Historic Preservation.”)

There’s good news for community development tax incentives: If history is any indication, there will be tax legislation in 2021 and proposals to create new incentives or expand existing incentives may be included.

Regardless of who wins the Nov. 3 presidential election, significant tax legislation is coming. That is true whether the Republican or Democratic Party controls the Senate. 

As discussed in this space previously, the past seven newly elected presidents (from Jimmy Carter through Donald Trump) signed major tax legislation within an average of six months after they took office. A win by Joe Biden–particularly if it’s paired with a Democratic sweep of the House of Representatives and the U.S. Senate–would likely lead to significant changes to the tax code in 2021 and boosts for community development, affordable housing, renewable energy and historic preservation incentives.

However, that’s not the only possible outcome.

A victory by Biden without control of the Senate would still likely lead to tax legislation. A victory by Trump–regardless of what happens in the Senate–would, too.

Should Trump win, he would follow in the footsteps of the past four reelected presidents (Ronald Reagan, Bill Clinton, George W. Bush and Barack Obama), who signed tax legislation within an average of 11 months of their second inauguration day. A Trump tax bill would likely look significantly different from a Biden tax bill, but regardless of who is president and who controls the Senate, tax legislation is likely coming and it could include new tax incentives.

New tax incentives don’t require unanimity in control of the federal government, as evidenced by two major examples. The low-income housing tax credit (LIHTC) was signed into law when Democrats controlled the House, but Republicans controlled the Senate and White House. The new markets tax credit (NMTC) was signed into law when Republicans controlled the House and Senate, but Democrats held the White House.

How 2021 Shapes a Tax Bill

The health of the nation in 2021 will have a major impact on tax legislation regardless of who is in control. The status of the COVID-19 pandemic and the related economic fallout is expected to be a major issue. Health care, the environment, racial justice and infrastructure would likely be at the top of the list of issues in a Biden presidency. Trump would likely focus on infrastructure and another major tax cut. 

One common priority, regardless of who wins the presidency, is infrastructure, which means tax incentives related to infrastructure are among the most likely to get a boost. Proposed community development tax incentives–such as the first-time homebuyers tax credit, neighborhood homes tax credit and infrastructure tax credit–are tax incentives related to infrastructure and could be included in a major infrastructure bill. These three incentives have bipartisan support, which puts them on the top of the list of potential new tax incentives.

However, if Democrats maintain control of the House of Representatives and win back control of the Senate and Presidency, three additional community development tax incentives would be included near the top of the list. The middle-income housing tax credit, the manufacturing communities tax credit and the renters tax credit each has strong Democratic support.

Let’s take a look at the bipartisan and Democratically supported incentives in more detail.

New Community Development Tax Incentives with Bipartisan Support

First-Time Homebuyers Tax Credit: This credit was temporarily available from 2008 to 2010 during the Great Recession, and Biden proposes the reinstatement and expansion of a tax credit for first-time homebuyers to encourage home purchases. The original first-time homebuyers credit was for $7,500 or $8,000, but Biden proposes a permanent $15,000 credit. In a pandemic-caused recession, this could be seen as a logical tool to incentivize home purchases, whether the decisions are made by Democrats or Republicans.

Neighborhood Homes Tax Credit: The Neighborhood Homes Investment Act (H.R. 3316, S. 4073) was introduced in 2019 and has bipartisan support: 12 Democratic and 11 Republican co-sponsors in the House (eight co-sponsors are on the Ways and Means Committee) and three Republican and two Democratic co-sponsors in the Senate, all members of the Finance Committee. The legislation would create a single-family tax credit similar to the LIHTC to help finance the rehabilitation of deteriorated one- to four-unit homes in distressed neighborhoods. The Moving Forward Act, the sweeping infrastructure bill passed in July by the House of Representatives, included the provision, giving it momentum. To qualify, homes would be required to be sold to households earning 140 percent or less of the area median income (AMI). The credit would cover the gap between development costs and sales prices, up to 35 percent of eligible costs.

Infrastructure Tax Credit: Bills were introduced in each of the past three terms of Congress to create infrastructure bonds and tax credits to fund federal infrastructure projects. Sens. John Hoeven, R-N.D., and Ron Wyden, D-Ore., were the lead sponsors on the bipartisan Move America Act and the 2019 House version had three Republican and two Democratic co-sponsors. Similar to the LIHTC and private activity bonds, Move America Bonds would be allocated to states based on their population size–an estimated $226 billion in bond authority over 10 years or $56 billion in tax credits. In the 2019 legislation, states could trade in some or all of their bond allocation for federal tax credits at a 25 percent rate. With both presidential candidates emphasizing infrastructure, this could be a popular choice, regardless of the election’s outcome.

New Incentives with Strong Democratic Support

Middle-Income Housing Tax Credit: This was introduced in each of the previous two terms of Congress by Wyden, who would be the Senate Finance Committee chairman in a Democratic-controlled Senate and would remain the Ranking Member should the Republicans keep control. Wyden’s 2018 legislation was for 50 percent of qualifying costs for properties where at least 60 percent of units are occupied by residents with incomes of 100 percent or less of the AMI. Wyden emphasized that the credit would echo the structure of the LIHTC, with funds allocated to states based on population and a competitive process for allocated tax credits.

Manufacturing Communities Tax Credit: Biden’s infrastructure plan, released in November 2019, included a $6 billion, three-year manufacturing communities tax credit, an echo of a proposal from legislation introduced by Sen. Sherrod Brown, D-Ohio, in 2014 and proposed in multiple budget requests when Biden was vice president. The credit would target investment in communities that experienced mass layoffs or the closure of a major government institution. If the manufacturing communities tax credit followed the structure set by the Obama administration, this credit would operate similar to the NMTC.

Renters Tax Credit: Biden proposes a new refundable tax credit for low-income renters to limit rent and utility payments to 30 percent of their monthly income–the same standard as Section 8 and public housing programs. This may be a particularly significant issue, since Biden’s running mate, Sen. Kamala Harris, D-Calif., introduced legislation to create a credit in each of the past two terms of Congress. Harris proposed a refundable uncapped credit for all households earning up to $100,000 per year ($125,000 per year in certain jurisdictions). A capped renters credit is also part of the Economic Justice Act, which was expected to be introduced in October.

Outlook

While the 2020 presidential election features candidates with very different plans and many moving pieces in the House and Senate, there will almost certainly be some sort of significant tax legislation in the next 12 months. As always, tax legislation provides a vehicle for proposed legislation, including new proposals.

A 2021 tax bill is a chance for existing affordable housing and community development tax incentive provisions to be expanded and enhanced, but it also will provide an opportunity for new provisions to spur development.