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Washington Wire: Administration Proposes Many Tax Provisions in New Budget

Published by Michael J. Novogradac on Thursday, March 1, 2012

Journal cover March 2012   Download PDF

In his proposed budget for fiscal year 2013, President Barack Obama recommended the passage of several tax provisions related to affordable housing, community development, historic preservation and renewable energy communities. Many of the proposals are promising, but it’s important to remember that all the ideas in the proposed budget face a long and no-doubt bumpy road to enactment in today’s Congress. The proposed budget also contains a number of possible changes to funding for the U.S. Department of Housing and Urban Development (HUD), which if enacted would have significant implications for the development of affordable housing.

Community Development
To the satisfaction of community development professionals, the president’s budget proposes extending and modifying the New Markets Tax Credit (NMTC) program. The budget would authorize two more rounds of NMTC allocations, one in 2012 and one in 2013, with an allocation amount of $5 billion for each round. Within this $10 billion, the President expects that at least $500 million ($250 million per year) will be used for investments related to promoting healthy food options in distressed communities as part of the Healthy Food Financing Initiative. The proposal also would allow NMTCs resulting from QEIs made after December 31, 2011 to offset the alternative minimum tax (AMT).

In addition, the administration proposes a new Manufacturing Communities Tax Credit to encourage investments in communities that have suffered a major job loss event. The budget proposal suggests the tax credit could be structured like the NMTC or as a credit similar to the Qualifying Advanced Energy Project Credit  program (enacted under Section 48C of the American Recovery and Reinvestment Act). The proposed manufacturing communities tax credit would be funded at a level of $2 billion in 2012, 2013 and 2014. Under the proposal, the Community Development Financial Institutions (CDFI) Fund would administer the program.
The proposal would make the Build America Bonds program permanent at a federal subsidy level equal to 30 percent through 2013 and 28 percent of the coupon interest on the bonds thereafter.  The 28-percent federal subsidy level is intended to be approximately revenue neutral relative to the estimated future federal tax expenditure for tax-exempt bonds. The proposal would also expand the eligible uses for Build America Bonds.

Historic Preservation
The Obama Administration’s proposed budget would not make any direct changes to the Historic Tax Credit program. However, it would replace the existing deduction for energy efficient commercial building property with a tax credit. Under the proposal, the tax credit would be equal to the cost of property that is certified as being installed as part of a plan designed to reduce the total annual energy and power costs. Costs in connection with the interior lighting, heating, cooling, ventilation and hot water systems of the building would be required to be reduced by 20 percent or more in comparison to a reference building that meets the minimum requirements of ASHRAE/IESNA Standard 90.1-2004. This provision was also included in the Administration’s fiscal year 2012 budget but was not enacted. The credit rate would range from 60 cents to $1.80 per square foot.

Renewable Energy
The proposed budget would extend and modify a number of renewable energy tax incentives. First, the proposal would extend the production tax credit for wind facilities and the investment tax credit for wind facility property to facilities and property placed in service in 2013.  

In addition, the Administration proposes extending the Section 1603 cash grant program to all otherwise qualifying property placed in service in 2012 (including property on which construction begins in 2012). For property that is placed in service after 2012, the proposal would replace the cash grant with a refundable tax credit administered by the Internal Revenue Service. The refundable tax credit would be available for property on which construction begins in 2009, 2010, 2011, 2012 or 2013. The Administration proposes that the tax credit be allowed with respect to property placed in service in 2013 (in the case of property, including wind facility property, that is part of a facility eligible for the renewable electricity production tax credit) and for property placed in service in 2013, 2014, 2015 or 2016 (in the case of any other energy property). Under the proposal, the qualification requirements for the refundable tax credit would be the same as the qualification requirements under the Section 1603 cash grant program.

The proposal would also authorize an additional $5 billion of Section 48C Advanced Energy Manufacturing Tax Credits. Regular readers will recall that the Section 48C program provided investment tax credits of 30 percent for facilities that manufacture energy equipment. The original program was capped at $2.3 billion in tax credits and was oversubscribed by a ratio of more than 3 to 1. If passed into law, the proposal would allow applications for the additional credits during the two-year period beginning on the date on which the additional authorization is enacted.  

Affordable Housing
Low-Income Housing Tax Credit
The Administration’s proposed fiscal year includes four provisions that would expand and amend the low-income housing tax credit (LIHTC). The first proposal would encourage mixed-income occupancy in LIHTC properties by allowing properties to elect a criterion employing a restriction on average income. When a taxpayer elects the proposed criterion, at least 40 percent of the units in the project would have to be occupied by tenants with incomes that average no more than 60 percent of area median income (AMI). No rent-restricted unit could be occupied by a tenant with an income of more than 80 percent of AMI; and, for purposes of computing the average, any unit with an income limit that is less than 20 percent of AMI would be treated as having a 20-percent limit. Maximum allowable rents would be determined according to the income limit of the unit. This provision was also proposed in the Administration’s proposed budget for fiscal year 2012 but was not enacted.  

This year, the proposal contains a new, additional rule for LIHTC-financed rehabilitation of HUD-assisted developments. The proposal would allow existing tenants whose incomes have increased to more than 60 percent of AMI but are less than 80 percent of AMI to remain in the development without jeopardizing the development’s eligibility for LIHTC financing. Currently, units occupied by tenants with incomes greater than 60 percent do not qualify for LIHTC assistance.

A second proposal related to the LIHTC would allow a real estate investment trust (REIT) that receives LIHTCs to designate as tax exempt some of the dividends that it distributes. Those dividends would be excluded from the gross income of the shareholders that receive them.  The amount designated under this provision would not be allowed to exceed the quotient of the REIT’s LIHTCs for the year, divided by the highest corporate tax rate in section 11(b) of the Internal Revenue Code. Under the proposal, the unused authority to designate tax-exempt dividends could be carried forward indefinitely. The proposal suggests that in the case of compliance failure, a REIT would be responsible for recapture under section 42(j) as if it had used the LIHTC to reduce its own tax liability. It is believed this change would make the LIHTC more attractive to REITs, and thereby increase demand for the credit. At this point it is hard to see how this provision would lead REITs to begin investing any meaningful amounts in LIHTCs.

To encourage the preservation of affordable housing, the Administration also proposes two additional changes to the low-income housing tax credit: a more efficient way to qualify for 30-percent-present-value credits, and the possibility of an additional 30 percent boost to qualified basis. For a rehabilitation project to be eligible for these incentives, a state housing credit agency would have to give the project a “Federal-Investment-Protection Designation.” This designation could be given only to projects that satisfy the following requirements:

  • the project involves the preservation, recapitalization, and rehabilitation of existing housing;
  • the project demonstrates a serious backlog of capital needs or deferred maintenance;
  • the project involves housing that was previously financed with federal funds or benefited from LIHTC; and
  • because of that federal support, the housing was subject to a long-term use agreement limiting occupancy to low-income households.

A rehabilitation project that was given this designation would qualify for 30 percent present value (4 percent) LIHTC without tax-exempt bond financing if the project receives a tax-exempt volume cap allocation that is not less than the amount of bonds that would be necessary to qualify for the LIHTC. The state’s remaining bond volume cap would be reduced as if tax-exempt bonds had been issued.

Also, and more importantly, if a rehabilitation project was eligible for 30 percent present value LIHTC, then the housing finance agency would be able to designate some, or all, of the qualified basis of the rehabilitation for a 30 percent basis boost. This 30 percent boost provision would be in addition to the 30 percent difficult to develop boost, if the property so qualified, such that the combined boost would be 69 percent. Only a limited number of properties could qualify for this extra 30 percent. This provision was in last year’s budget, with a limit set at 0.4 percent of a state’s bond volume authority. This year the limit is doubled to 0.8 percent.  Interestingly, the revenue cost of the provision this year is about the same as the projected revenue cost of last year’s proposal. Perhaps a sign that the feedback the industry provided on the provision last year impacted the scoring, as well as design, of the provision this year.

Finally, the Administration proposes requiring LIHTC-supported housing to provide protections similar to those provided in the Violence Against Women Act in all long-term use agreements. The protections would apply to both the low-income and the market-rate units in the building. This proposal is new, and is not expected to have any significant budgetary impact.  

Housing Bonds
In the proposed budget for fiscal year 2013, the Administration proposes limiting the tax rate at which upper-income taxpayers can use tax-exempt interest to reduce tax liability to a maximum of 28 percent. This limitation would affect married taxpayers filing a joint return with adjusted income of more than $250,000 and single taxpayers with income more than $200,000. The limit would be effective for taxable years beginning after December 31, 2012. If enacted, this change would cause tax-exempt bond rates to rise. Theoretically, bonds rates would rise about 10 percent, but the actual impact would probably be somewhat less.

HUD
In addition to these tax provisions, a major element of the Administration’s proposed budget for fiscal year 2013 is the level of funding it provides for affordable housing programs under HUD.

For fiscal year 2013, the Administration proposes funding HUD at $44.8 billion, which represents a $1.4 billion (3.2 percent) increase compared to the enacted fiscal year 2012 HUD appropriations. However, HUD also projects about a $4.4 billion increase in net revenues generated from Federal Housing Administration activities. As such, total “discretionary outlays” reflect a cut of $6.8 billion (16.5 percent) compared to  fiscal year 2012.  Furthermore, “total  outlays” are cut by $10.5 billion (22.7 percent) from fiscal year 2012.

Few of the program-specific funding requests come as a surprise to the affordable housing community, but one proposal in particular has raised significant concerns: the budget request for Section 8 Project Based Rental Assistance (PBRA). The Administration has requested a total of $8.7 billion for PBRA program needs. This figure includes $8.3 billion for fiscal year 2013 and a $400 million advance appropriation for fiscal year 2014. Under the Administration’s’ request, the total funding level for fiscal year 2013 is $639 million less than the fiscal year 2012 enacted amount of $9.340 billion. At the requested level, some contracts will receive less than 12 months of funding. HUD says that the number of contracts that will continue to receive 12 months of funding is a function of how HUD distributes funding across contracts throughout the year. Currently HUD estimates that it will administer this funding to provide 12 months of funding for approximately 5,300 renewal contracts, i.e., for contracts that expire during fiscal year 2013, and for multiyear term contracts that have an annual renewal funding cycle occurring during the first quarter of the fiscal year. These 5,300 contracts cover approximately 360,000 units, or about one-third of the PBRA renewal portfolio. HUD says the remaining 10,600 multiyear term renewal contracts, covering approximately 739,000 units (those with an annual renewal cycle other than during the first quarter of fiscal year 2013), would be funded for less than 12 months, to varying degrees depending on their renewal date.

The affordable housing community is very concerned about this proposal because it sets up a scenario for a funding shortfall. Just such a shortfall developed in 2007 and caused significant disruption until Congress provided additional funding in the Recovery Act in 2009.  

Peter Lawrence explores the proposed HUD budget in more detail in his column on page 10.

Conclusion
As evidenced by the number of proposals that are repeated from previous budgets, the inclusion of a tax provision or spending request in an administration’s budget is just the first step in a long process. That said, it’s never too early to advocate for worthy programs or provisions that would improve them.

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