Washington Wire: Budding Interest in What Lies Beyond the Tax Reform Horizon

Published by Michael Novogradac on Friday, August 1, 2014
Journal thumb August 2014

Ensuring that low-income housing tax credits (LIHTCs) and new markets tax credits (NMTCs) are preserved during tax reform remains the top priority of affordable housing and community development stakeholders.

Pending and possible membership and leadership changes in Congress obviously hold considerable significance for tax extenders and tax reform. With the retirement of Ways and Means Committee Chairman Dave Camp, R-Mich., who has played a leading role in recent years’ tax reform efforts, Rep. Paul Ryan, R-Wis., is the rumored frontrunner to assume leadership of the tax-writing House Ways and Means Committee. If Republicans gain control of the Senate, chairmanship of the Senate Finance Committee could shift from Sen. Ron Wyden, D-Ore., to Sen. Orrin Hatch, R-Utah. These transitions could undermine any reassurance the tax credit community found in the fact that Rep. Camp’s tax reform proposal didn’t call for the elimination of the LIHTC or NMTC. So it remains imperative that affordable housing and community development supporters stay focused on preserving these important incentives.

But while the road toward tax reform remains long and the outcome is far from certain, some affordable housing and community development professionals may be wondering, if preservation efforts are successful and LIHTCs and NMTCs are retained in a reformed tax code, what’s next?

LIHTC Priorities
Fixed Rate Floor
For affordable housing advocates, extending and making permanent the 9 percent credit rate floor is the first order of business. The fixed rate floor provides LIHTC allocating agencies the option to allocate more tax credits to a particular development that accomplishes certain socially beneficial goals, such as serving lower income families and providing additional amenities and social services. The inability to allocate more tax credits translates into a loss of project equity, and consequently, more difficult trade-offs for the affordable housing community. For example, larger amounts of equity allow developers to lower rents to provide affordable housing to particular groups, such as veterans, or to build physical amenities, such as community rooms and community service facilities that improve quality of life for residents and can be vital in providing a sense of community and supporting broader community development goals. Furthermore, some high-impact proposed developments are financially infeasible without the minimum 9 percent rate.

A related proposal to establish a minimum 4 percent rate floor for allocated LIHTCs used to acquire existing housing (but not for 4 percent LIHTC generated by tax-exempt multifamily bonds) was advanced in the Senate Finance Committee in April. This is also a top priority for advocates, but will be more difficult to enact, as it is not an extension of existing tax policy.

While establishing a fixed rate floor is the top priority, conversations have begun to emerge within the LIHTC community about preparing to advocate for two policy options that could expand the LIHTC program in the future to help meet the significant need for additional affordable rental housing. Discussions about an increase in LIHTC allocations and enabling states to convert some of their private activity bond authority into LIHTCs began in earnest after Chairman Camp included the LIHTC in his tax reform discussion draft. Such an inclusion was the first sign that the threat of tax reform had abated. However, serious efforts to enact these proposals aren’t likely to start until it’s clear that the new Ways and Means chairman also wants to preserve the LIHTC in tax reform and after the top priority of extending the minimum LIHTC rates is achieved.

LIHTC Allocation Increase
One idea that has piqued some interest was originally proposed in a 2013 report from the Bipartisan Policy Center’s (BPC) Housing Commission called “Housing America’s Future: New Directions for National Policy.” In its report, the commission recommended a series of changes to the nation’s housing policy and finance system, including a 50 percent expansion in LIHTC allocations. The commission also called for additional federal gap funding for LIHTC developments.

The report said, “The commission strongly believes the LIHTC must be preserved. Furthermore, to help address the growing demand for rental housing, we recommend that the annual LIHTC allocation be increased by 50 percent, as the resources are identified, to support a higher level of affordable housing development.” The commission estimated that a 50 percent increase in the allocated LIHTC would support the preservation and construction of 350,000 to 400,000 additional affordable rental housing units over a 10-year period at an average annual cost of $1.2 billion over the first 10 years.

The commission suggested that an increase in available LIHTCs would provide an opportunity to refine the targeting of tax credits to ensure the program is meeting the most critical rental housing needs. The report submitted two possible approaches. One option would be to allocate additional LIHTCs based on a formula that measures a state’s share of cost-burdened renters; the other option would base LIHTC allocation on the relative size of a state’s renter population. “Either would be an improvement over the existing allocation formula, which is based on a per capita calculation and does not reflect differences from state to state in the share of the overall population who rents or has a rent burden,” the report said.

Former senate majority leader and BPC Founder George Mitchell authored a blog post Feb. 3, 2014 that included support for the proposal to boost LIHTC allocations by 50 percent. Mitchell is considered one of the fathers of the LIHTC program. He wrote, “With a long track record of success, the [LIHTC] has been our nation’s most effective tool in supporting the production of rental housing for low-income families. The [LIHTC] is a true private-public partnership, engaging private market forces to build affordable housing while minimizing risk to the federal government and the taxpayers.”

Supporters of the LIHTC allocation increase proposal note that the LIHTC already has bipartisan support in Congress and the support of the BPC. However, there are some concerns about the BPC-estimated $12 billion cost of the proposal, which would make congressional approval a steep hill to climb. And it bears noting that the threat of base-broadening tax reform still looms, which will make expansion of tax expenditures difficult.

In the same post, Mitchell also wrote that “in light of the great need for more affordable rental housing, creative ideas to maximize the [LIHTC’s] impact merit serious consideration.” Specifically, he mentioned a proposal in President’s Barack Obama’s fiscal year (FY) 2014 budget proposal that suggested increasing support for the LIHTC by permitting states to convert up to 7 percent of their qualified private activity bond (PAB) cap into LIHTC allocation authority. The administration estimates that if a state were to make maximum use of this conversion option, allocation authority would increase by 19 percent.

Private Activity Bond Conversion
Similar to the FY 2014 proposal, the administration’s FY 2015 budget proposal suggested allowing states to increase their LIHTC authority by converting some of their private activity bond volume cap into LIHTC allocations. Under the FY 2015 proposal, states would be authorized, at their discretion, to convert up to 8 percent of their PAB cap to 9 percent LIHTC authority. The maximum possible national increase in LIHTC authority under this proposal would be 23 percent. The conversion rate would be determined by $1,000 times twice the applicable percentage of the 30 percent value LIHTC in December of the previous year. For example, using the December 2013 rate of 3.25 percent, for every $1,000 of PAB cap, states could increase their LIHTC authority by $65. This proposal came out of the administration’s desire to balance housing policy by promoting more rental opportunities; this change would allow states to issue more LIHTCs at a lower cost than by increasing per-capita allocations.

The projected cost of the proposal is lower than that of a straight 50 percent LIHTC increase, which could make it easier to support for some lawmakers. However, the bond conversion proposal is more complex and thus more difficult to explain, which could slow traction in Congress. In addition, some states fully allocate their private activity bond volume cap, which would prevent them from being able to access any additional LIHTC authority under this proposal.

NMTC Priorities
Obviously, for community development advocates, extending and making permanent the NMTC program is the primary goal. The NMTC program expired Dec. 31, 2013. And even though at the time of this writing the Community Development Financial Institutions (CDFI) Fund was expected to open another allocation application round in late July in anticipation of a program extension, there technically isn’t any NMTC authority available for new allocatees.

In addition to program extension, there has also been a push toward expansion when making the NMTC permanent, namely an increase the amount of NMTC authority made available each year. For each of the 11 allocation rounds to date, demand for NMTC authority has exceeded supply by an average ratio of 7-to-1. Separate proposals from the administration and Congress have called for extending the NMTC at $5 billion per year. This would represent a 30 percent increase over the previous years’ $3.5 billion in allocation authority.

In its proposed budget for FY 2015, the Obama administration proposes permanently reauthorizing the NMTC program in 2015 and requests $5 billion of allocation authority per year. It’s worth noting that this is the fifth year in a row the administration has included support for this level of funding in its annual budget proposal.

In Congress, legislation to extend the NMTC at about the $5 billion level has been proposed for more than six years, basically since the program’s cap was temporarily increased to $5 billion by the American Recovery and Reinvestment Act (ARRA) for 2008 and 2009. The current bipartisan bill to expand the NMTC was proposed April 2 by House Ways & Means Committee Members Jim Gerlach, R-Pa., and Richard Neal, D-Mass. Rather than setting the annual allocation authority at a specific higher level, H.R. 4365, the New Markets Tax Credit Extension Act of 2014, would index the NMTC for inflation and make the program permanent. At the time of this writing, H.R. 4365 had 71 bipartisan cosponsors. Companion legislation in the Senate, S. 1133, was introduced June 11, 2013, by Sens. Roy Blunt, R-Mo., and Jay Rockefeller, D-W.V., and currently has seven bipartisan cosponsors.

To date, efforts to secure additional allocation authority for the NMTC program have been unsuccessful. The four allocation rounds since 2009 have been capped at $3.5 billion each, and the Senate Finance Committee advanced legislation providing another two years at $3.5 billion annually. Nonetheless, the consistent bipartisan support for a higher level of funding for this program is an encouraging indication that Congress and the White House understand how constructive this program has been and how much potential it holds for low-income communities in need of revitalization.

Again, ensuring a future for the LIHTC and NMTC is priority one for the affordable housing and community development supporters. But beyond that horizon, there are a number of important ideas being discussed that have the potential to make those futures even more promising.