Tax Advocacy Sandlot Strategy–Small Ball in 2020, Swing for the Fences in 2021

Published by Michael Novogradac on Monday, February 3, 2020
Thumbnail Cover February 2020

Affordable housing and community development groups will likely be playing tax legislative small ball this year, as presidential election years are historically difficult for major tax bills, with the norm being modest tax bills.

In 2021, though, tax advocacy groups will likely have an opportunity to swing for the fences.

Starting with Jimmy Carter, every president has seen a major tax bill enacted within an average of eight months after inauguration. Time to major tax legislation shortens to barely more than six months for a newly elected president and expands to 11 months for a re-elected president.

The implications for affordable housing, community development, historic preservation and renewable energy incentives are significant.

This year, in playing small ball–a baseball term that describes focusing on a low-profile strategy of singles, walks, stolen bases and sacrifice bunts, rather than flashy outcomes such as home runs–advocates will push for important revisions to existing tax incentives. Affordable housing advocates will prioritize support for a permanent 4 percent floor for the low-income housing tax credit (LIHTC). Those in community development will advocate for a further extension of the new markets tax credit (NMTC) incentive. Promoters of the opportunity zones (OZ) incentive will push for reporting requirements. Historic preservation champions will seek the elimination of the basis adjustment in the historic tax credit (HTC). Renewable energy advocates will call for an adjustment or elimination of the solar investment tax credit (ITC) phasedown.

These provisions could be part of legislation in 2020–perhaps as part of a health bill in a few months, as part of funding the government in the fall, or some other tax vehicle unforeseen at this time. However, more expansive enhancements to the incentives–found in the Affordable Housing Credit Improvement Act, the New Markets Tax Credit Extension Act, the Historic Tax Credit Growth and Opportunity Act and other legislation–stand a considerably better chance in 2021, or perhaps 2022, depending on November’s election results.

Newly Elected Presidents

Since and including Carter, every newly elected president has had a major tax bill in his first year in office. The lineage goes back only to Carter because he took office from Gerald Ford, who became president when Richard Nixon resigned due to the Watergate scandal. With tax legislation, like other presidential traditions, the 29-month term for Ford complicates things.

Carter took office Jan. 20, 1977, promising a post-Watergate era in Washington. Within about four months, on May 23, 1977, he signed the Tax Reduction and Simplification Act of 1977, creating a flat standard deduction while extending the general tax credit and the earned income tax credit for one year each. The bill also extended some business tax reduction provisions for a year, but did not change corporate rates. The next year, the Revenue Act of 1978 became law Nov. 6, reducing both individual and corporate tax rates, while increasing the personal exemption and standard deduction for taxpayers. That bill also increased and made permanent the earned income credit while creating the federal HTC–a 10 percent credit for commercial buildings that met certain standards.

Carter lost his bid for re-election in 1980 and Aug. 13, 1981–less than seven months after taking office–Ronald Reagan signed the landmark Economic Recovery Tax Act, also known as the Kemp-Roth Act. That bill included a 25 percent reduction in marginal tax rates (indexed for inflation) for individuals and cuts for other taxes: estate, capital gains and corporate rates all were reduced.  The bill also expanded the HTC to three tiers of credit percentages: 15 percent for buildings 30-39 years old, 20 percent for buildings 40 years old or older and 25 percent for buildings deemed historic structures.

Eight years later, following the Tax Reform Act of 1986 (TRA ’86, addressed in the next section), Reagan’s vice president, George H.W. Bush, succeeded Reagan in the Oval Office. In his first year, Bush signed the Omnibus Budget Reconciliation Act of 1989, which contained significant LIHTC provisions (including a one-year extension), but no substantial changes to tax rates. By the end of 1990, though, the federal deficit was growing and Bush faced a requirement to reduce the deficit or cut entitlement programs. He signed the Omnibus Budget Reconciliation Act of 1990, which raised the individual, alternative minimum, payroll and excise taxes, while limiting itemized deductions for high-income taxpayers. That legislation also extended the LIHTC for six months.

Clinton took over for Bush in 1993 and on Aug. 10 of that year, he signed the Omnibus Budget Reconciliation Act of 1993–permanently extending the LIHTC, but also increasing the individual, corporate, fuel and other tax rates.

Eight years later, after George W. Bush took over in 2001, another major tax bill passed quickly. The Economic Growth and Tax Relief Reconciliation Act of 2001 became law June 7, less than five months after Bush’s inaugural address. The legislation reduced individual tax rates, capital gains tax and eliminated the estate tax. It was the first part (followed by the Jobs and Growth Tax Relief Reconciliation Act of 2003) of what came to be known as the “Bush Tax Cuts.”

Obama succeeded Bush in early 2009 and the American Recovery and Reinvestment Tax Act of 2009 was signed into law Feb. 17, 2009–28 days after Obama took office. The bill contained significant federal spending–proposed to address the Great Recession, which was in full effect–as well as a payroll credit for individuals, an increase in the alternative minimum tax (AMT) for one year and several provisions to protect and encourage tax incentives. Those included the Section 1602 LIHTC exchange program, an allocation of $2.5 billion to state LIHTC allocating agencies in HOME funds, an additional $1.5 billion for the 2008 and 2009 NMTC allocation rounds, the option for renewable energy production facilities to elect the ITC rather than the production tax credit and the Section 1603 program to receive a grant in lieu of ITCs.

After Obama served eight years, Trump took office and before the end of 2017, the most significant tax bill since 1986 was signed into law. The legislation popularly known as the Tax Cuts and Jobs Act of 2017 reduced the individual and corporate tax rates, while increasing the standard deductions for individuals. The legislation also included the OZ incentive.

Seven presidents, seven major tax bills, enacted in an average of a little over six months, with the longest being George H.W. Bush and Donald Trump at 11 months, and the shortest being Barack Obama at 28 days.

Second-Term Tax Bills

Second terms also bring major tax legislation, though not always as quickly. Four presidents in that period–Ronald Reagan, Bill Clinton, George W. Bush and Barack Obama–were re-elected. All four signed tax bills, within an average of about 11 months of their second inauguration.

Reagan was about 20 months into his second term as president when TRA ’86 passed and was signed into law. That sweeping legislation included a rewrite of the IRC’s most recent update in 1954 and changed the individual tax rates–reducing the top rate and increasing the bottom rate. The corporate tax rate was dropped from 50 percent to 34 percent and several other sweeping changes were made, including the elimination of the difference in calculating capital gains and ordinary income taxes. Of course, TRA ’86 also introduced the LIHTC.

Eleven years later, seven months into Clinton’s second term as president, the Taxpayer Relief Act of 1997 was signed into law, reducing the capital gains tax rates by nearly 50 percent, repealing the AMT for small businesses and introducing an education tax credit.

Fast forward to May 2006, the second year of George W. Bush’s second term, when the Tax Increase Prevention and Reconciliation Act of 2005 signed into law, about 16 months after his inauguration. The bill extended the capital gains and dividends tax rates through 2010, increased the AMT exemption and increased expensing allowance for depreciable property from $25,000 to $100,000.

The most recent two-term president, Obama, signed the American Taxpayer Relief Act of 2012 on Jan. 1, 2013–19 days before his second inauguration, but nearly two months after he was re-elected. That legislation permanently extended tax cuts from the 2001 and 2003 Bush legislation and repealed the limitation of itemized deductions. The bill also extended the NMTC for two years, extended the 9 percent LIHTC floor and the wind production tax credit for one year.

Four second-term presidents and four tax bills, signed an average of 11 months after their inauguration.

Caveat: Election Years Usually Include Some Tax Legislation

While major tax legislation seldom is enacted in presidential years, passage of at least a modest tax bill is the norm. In fact, tax bills have been enacted in 10 of past 11 presidential election years–although only a few were substantial.

1976: The Tax Reform Act of 1976 increased the standard deduction and temporarily lowered small-business tax rates.

1980: The Crude Oil Windfall Profit Tax Act of 1980 created an excise tax on the U.S. oil industry, legislation that was amended several times before being repealed in 1988.

1984: The Deficit Reduction Act of 1984 increase excise taxes and set the maximum estate tax rate at 55 percent.

1988: The Technical and Miscellaneous Revenue Act of 1988 was the most prominent bill passed that election year–it included corrections to TRA ’86, including for the LIHTC. The most notable of those was allowing properties to be placed in service as many as two years following the year in which the LIHTC is allocated to the property.

1996: After no tax bills passed in 1992, the Health Insurance and Portability Act of 1996 and the Small Business Job Protection Act of 1996 were signed, each containing narrow changes.

2000: The Consolidated Appropriations Act of 2001 was signed into law in 2000. That was a milestone bill for community development and affordable housing, as it included the creation of the NMTC and an increase of the LIHTC per-capita cap, along with an inflation adjustment factor.

2004: The Working Families Tax Relief Act of 2004 extended provisions of the Bush tax cuts and the American Jobs Creation Act of 2004 increased Internal Revenue Code Section 179 expensing.

2008: The Great Recession hit and several tax bills passed, making this an extreme outlier among election years. The Economic Stimulus Act of 2008 included tax rebates and provided new business expensing and depreciation allowances. The Housing and Economic Recovery Act of 2008 addressed the housing market collapse and increased the LIHTC allocation, set a temporary 9 percent LIHTC floor and contained other LIHTC provisions. Shortly thereafter, the Emergency Economic Stabilization Act of 2008 increased the AMT exemption, lowered the threshold for the child tax credit and extended the NMTC.

2012: The Middle Class Tax Relief and Job Creation Act of 2012 extended decreases in the Old Age, Survivors and Disability Insurance tax.

2016: The Consolidated Appropriations Act, 2016, delayed and suspended some health care-related taxes, while modifying some renewable energy incentives.

Coming in 2021

Whether Trump wins re-election or someone unseats him, history suggests there will be major tax legislation that will pass and be signed in 2021. The magnitude and focus of the legislation depends on the makeup of Congress and who wins the presidential election.

As of the writing of this column, the presidential race is considered largely a toss-up–one amplified by a lack of early clarity about who will win the Democratic nomination. The strong state of the economy is historically a solid predictor of a president’s chance for re-election, but the first three years of Trump’s presidency show that many historic trends are no longer in play.

In Congress, Republicans appear to have an edge to retain control of the Senate and Democrats have the edge to retain control of the House.

A Trump re-election probably means extending and tweaking provisions of the 2017 tax legislation. A Democrat in the White House likely means reversals of some of the 2017 provisions and almost assuredly an increase in the corporate rate. A Democrat president also could promote a major tax bill including infrastructure provisions and the expansion of many community development, affordable housing, historic rehabilitation and renewable energy provisions. Also expected in that scenario is an increase in tax rates for high-income taxpayers.

With 2021 coming fast–within a few months, we will likely know the Democrat candidate for president, a few months after that, we will have the general election–this is an important year for community development, affordable housing, historic preservation and renewable energy advocates to make their case.

The seeming inevitability of 2021 tax legislation should serve as motivation to stay focused on promoting the importance of tax incentives and to clarify their significance.