Key Provisions, Vehicles: How to Pass Community Development Tax Incentive Extensions, Enhancements in 2023
Published by Michael J. Novogradac on Tuesday, August 1, 2023
With a presidential election year looming in 2024 and a host of tax provisions expiring in 2025, the final months of 2023 are crucial for community development tax incentive legislation.
Bills that would expand or enhance the low-income housing tax credit (LIHTC), new markets tax credit (NMTC) and historic tax credit (HTC) have been introduced this year. So have proposals for a neighborhood homes tax credit (NHTC) and middle-income housing tax credit (MIHTC). Before the end of the year, we expect they will be joined by major opportunity zones (OZ) legislation.
Standalone tax legislation rarely passes. It’s most commonly attached to a larger, broader bill. This makes the next four months particularly important: Including community development tax incentive provisions in broader legislation comes down to a group of possible legislative vehicles and the outcome of Congressional negotiations, led by Rep. Jason Smith, R-Missouri, chair of the House Ways and Means Committee, and Sen. Ron Wyden, D-Oregon, chair of the Senate Finance Committee.
Timing is Everything
The calendar matters for legislation. Next year is a presidential election year, a time when it’s notoriously difficult to pass major legislation, as Democrats and Republicans in Congress look to stop the other from getting credit for legislation on which they can campaign–particularly when either or both chambers could flip. Add to that the looming 2025 “fiscal cliff,” where many tax provisions–including most of the 2017 “Trump tax cuts”–are set to expire. If Congress doesn’t pass tax legislation this year, it may punt the next major opportunity to that 2025 deadline.
However, the year before a presidential election is sometimes fertile for tax legislation. The two most recent such years saw the passage of legislation that included significant community development tax incentives.
In December 2015, the Protecting Americans from Tax Hikes (PATH) Act was enacted. It included a provision to permanently extend the minimum 9% LIHTC, a five-year NMTC extension and an extension and phasedown of the renewable energy investment tax credit (ITC) and production tax credit (PTC). In 2019, year-end tax legislation included provisions to extend the NMTC and PTC by a year as well as $1 billion in extra disaster LIHTCs for wildfire-stricken areas of California.
Tax legislation is possible this year–and a variety of community development tax incentive bills have provisions that could be included.
Year-End Tax Incentive Wish List
Clean energy tax incentives were largely addressed in the Inflation Reduction Act of 2022 and await further Treasury guidance for full implementation. But bills that extend, expand or create other community development tax incentives have been introduced or will be introduced in Congress this year:
- The Affordable Housing Credit Improvement Act (ACHIA) of 2023 would restore the 12.5% LIHTC cap increase that expired in 2021 and further increase allocation by 50% over two years, decrease the private activity bond (PAB) financed-by test from 50% to 25% and provide basis boosts for a variety of rural, Tribal and extremely low-income properties. This legislation includes myriad other provisions and is popular: as of early July, there were 24 Senate co-sponsors and 124 House co-sponsors.
- The New Markets Tax Credit Extension Act of 2023 would make the NMTC a permanent part of the tax code and provide an annual inflation adjustment factor and allow the NMTC to be taken against alternative minimum tax. With three more rounds of NMTC allocation authority by Congress, this bill faces a challenge to be considered in 2023 because its expiration coincides with the provisions that expire in 2025 and Congress may wait until that deadline before acting.
- The Historic Tax Credit Growth and Opportunity (HTC-GO) Act would create a 30% HTC for projects that cost less than $3.75 million, eliminate the basis-adjustment requirement and decrease the substantial rehabilitation test threshold from 100% to 50% of expenses, among other provisions.
- The Neighborhood Homes Investment Act would create a single-family tax credit like the LIHTC to help finance the new construction or acquisition and rehabilitation of owner-occupied homes in distressed neighborhoods.
- A provision for a middle-income housing tax credit was included in the Decent, Affordable, Safe Housing for All (DASH) Act introduced in March. It’s expected that a standalone MIHTC bill will be introduced this year to address rental housing for tenants who earn from 60% to 100% of area median income and provide significant review to make it easier to include in future legislation.
- Several narrow bills concerning OZs were introduced in early 2023, but a more substantial bill is coming to extend the tax incentive, include reporting requirements and address other issues.
With community development tax incentive legislation teed up, there is the opportunity to incorporate provisions in broader legislative vehicles. Having the bills ready and reviewed makes it simpler for subsequent legislation to include the provisions.
There are a series of potential vehicles for the tax-oriented provisions.
Likely Legislative Tax Vehicles
The most common legislative vehicles for tax provisions are those considered must-pass because they authorize funding for the federal government or continue funding for essential functions. Four major bills that fit that description, with a fifth possible legislative vehicle for tax provisions.
- A year-end spending bill. In most years, there is year-end legislation combining all annual spending bills, often called an omnibus spending bill, to fund the federal government and it often is a vehicle for bipartisan tax legislation. While the annual spending bills expire at the end of the federal fiscal year, Sept. 30, Congress frequently passes a temporary stopgap funding bill (a continuing resolution) to provide funding for the federal government until November or December to give time to finalize the annual spending bills. Negotiations on the tax legislation that could be included in year-end legislation took a step forward with a trio of bills passed in mid-June by the Republican-controlled House Ways and Means Committee: the Small Business Jobs Act, Tax Cuts for Working Families Act and Build It in America Act. The legislation may take time to navigate through the House because Republicans hold a narrow majority (like Democrats in the Senate) and require nearly every vote. The headline tax provision in negotiations for Senate Democrats will likely be a reinstatement of the extended federal child tax credit–whether for a year-end bill or other legislation. There is a good chance for inclusion of community development tax proposals.
- Federal Aviation Administration Reauthorization. The FAA bill already has a tax component due to various aviation taxes and it has a Sept. 30 deadline, although that can be extended on a temporary basis. One reason for optimism is that the chair of the Commerce, Science and Transportation Committee (which has jurisdiction over FAA) is Sen. Maria Cantwell, who is also the lead sponsor of the AHCIA, but the inclusion of community development tax incentives would take some work.
- Farm bill. Another must-pass bill with a Sept. 30 deadline is the five-year farm bill, which could similarly be included in a continuing resolution to fund the government until a future deadline. This is a possibility because it has tremendous influence on rural farms (a Republican priority) and the Supplemental Nutrition Assistance Program (a Democratic priority). Of the various potential tax incentive vehicles, this is the one most likely to bleed into 2024, as a fight over the SNAP benefits may take a while. But there’s an argument for completion in 2023: Sen. Debbie Stabenow, D-Michigan, chair of the Senate Committee on Agriculture, Nutrition and Forestry, is retiring at the end of this year, so she likely wants this finished before she leaves.
- National Defense Authorization Act. This has passed 61 years in a row and typically doesn’t have a tax title included, but often carries non-defense-related legislation and so it’s possible it could include tax legislation if leadership decides to do so. In mid-July, there was talk about some tax amendments being included. This legislation generally passes near the end of the year, so there is a possibility that it could be a last, best hope for tax incentive provisions.
- China competition bill. The fifth possibility would be a second China competition bill, following the CHIPS and Science Act of 2022, which provided more than $50 billion for American semiconductor research, development, manufacturing and workforce development. In June, Sen. Todd Young, R-Indiana, suggested adding a tax element to such legislation, including immediate write-offs for research and development costs. That desire opens the door for negotiations on other tax provisions, including community development tax incentives. Again, Cantwell as the chair of the Commerce, Science and Transportation Committee would have jurisdiction over such legislation and thus would be in a strong position to influence the bill.
What to Watch
With multiple legislative priorities and at least five potential vehicles, expect plenty of movement over the final months of this year.
As stated earlier, the starting point in negotiations will likely be the three Ways and Means-passed bills for the Republicans and the expanded child tax credit for Democrats. Smith has publicly expressed optimism about working with Wyden on the child tax credit and the housing tax credits, suggesting a path to an agreement that includes at least those provisions. Regardless, both foundational issues leave room for negotiation, which is where various community development tax incentives could find a home. Wyden and Smith have historically been supporters of the LIHTC and NMTC, and Smith is a strong supporter of the HTC, so provisions could make it into one of the vehicles.
A crucial element is size of the legislation: The larger the bill, the more likely that community development tax incentives go along for a ride.
While the presidential election and the 2025 fiscal cliff are on the horizon, other tax issues merit consideration this year, including the research and development amortization of expenses, IRC Section 163(j) limit on debt deduction, bonus depreciation and more. Community development tax incentives could benefit from a desire among legislators to extend or reinstate other provisions before 2025.
There’s reason for optimism that 2023 will see significant movement for community development tax incentives to be part of broader legislation. This is an important time to make sure your voice is heard by legislators.