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Washington Wire: Fiscal Cliff Avoided, Several Slopes Remain

Published by Michael J. Novogradac on Friday, February 1, 2013

Journal cover February 2013   Download PDF

When Congress approved legislation in the 13th hour to avoid the fiscal cliff, a number of key tax provisions were extended – to the relief of the tax credit community – but many issues were only postponed, leaving a number of deadlines looming in the immediate future. And instead of building a bridge between lawmakers on either side of the aisle, in some respects the battle fought in the closing days of the 112th session of Congress may have deepened the political chasm, possibly making future negotiations on the fiscal slopes that remain just as arduous for lawmakers to navigate.

What the Bill Addressed Temporarily
H.R. 8, the American Taxpayer Relief Act of 2012, included a number of tax provisions in the style of previous “tax extender” bills in that they address temporary extensions of specific tax expenditures.

Among other things, H.R. 8 extends the new markets tax credit (NMTC) for two years, providing a maximum annual amount of qualified equity investments of $3.5 billion each year. It also extends and modifies the 9 percent low-income housing tax credit (LIHTC) floor for allocations made before Jan. 1, 2014. The placed in service requirement is no longer applicable. The bill retroactively extends the provision that the basic housing allowance of a member of the military is not considered income for purposes of calculating whether that person qualifies as a low-income tenant from Dec. 31, 2011, through Dec. 31, 2013. H.R. 8 also includes a one year extension of 50 percent bonus depreciation and a one year extension of the wind production tax credit (PTC). (The language of the law includes an important change that is discussed in more detail on pages 68 and 69.)

What the Bill Addressed “Permanently”
In addition, H.R. 8 addresses income tax rates. The highest income tax rate on ordinary income will be unchanged for joint filers earning less than $450,000 per year or $400,000 in the case of single filers. On amounts above those thresholds, the rate will increase from 35 percent to 39.6 percent. For amounts below those thresholds, the law permanently extended existing tax rates. In addition, for taxpayers above those upper thresholds, the top tax rate on long-term capital gains and dividends has increased from 15 percent to 20 percent.

Another significant provision of the bill is that it permanently and retroactively adjusts the alternative minimum tax (AMT) threshold to prevent this tax from affecting additional taxpayers. This permanent action on the AMT will have an important ripple effect on other provisions that are addressed each year on a temporary basis because H.R. 8 eliminates the need for the annual AMT patch that has become a regular feature of the perennial tax extenders package. Such tax extender bills have become the most common vehicle for the extension of tax expenditures such as the NMTC and PTC. Because of the widespread impact of the AMT patch, its inclusion in tax extender packages was often a key factor in their momentum and passage. Without the AMT patch, some of that momentum may be lost, making future tax extender bills slower and more difficult to pass.

What the Bill Excluded
There are a number of things the fiscal cliff bill didn’t address. For example, lawmakers chose not to extend the payroll tax holiday that had temporarily lowered the employee portion of the Social Security tax from 6.2 percent to 4.2 percent. They also opted not to include tax relief for areas affected by Hurricane Sandy. At the time of this writing, however, momentum continued to build for a Hurricane Sandy relief package that could include a 3-year annual $500 million emergency supplemental NMTC allocation for community development entities (CDEs) serving disaster areas, an increase the historic tax credit from 20 percent to 26 percent for the rehabilitation of buildings within the disaster zone, and a three year annual increase in affected states’ LIHTC authority of $8 multiplied by the disaster-area population.

More significantly, H.R. 8 didn’t include an increase in the debt limit. The Treasury Department can take certain “extraordinary measures” to avoid default in the near term but it is anticipated that Congress will need to act by March or April to raise the debt ceiling or allow the nation to default on its spending obligations. In a flashback to the negotiations in 2011 that created the Joint Select Committee on Deficit Reduction, as well as the sequestration measures lawmakers are currently scrambling to avoid, Republicans have said major spending concessions must be made before they will again agree to raise the debt ceiling. President Obama has suggested he won’t be drawn into negotiations like those of the summer of the Super Committee.

What the Bill Delayed
Despite the intense focus on avoiding the deep spending cuts mandated by the Budget Control Act, known as sequestration, lawmakers only kicked the proverbial can a few months down the road. The American Taxpayer Relief Act delays until March 27 approximately $109 billion in across-the-board spending cuts originally scheduled to take effect on January 2. Now the cuts will occur on March 27, unless Congress takes action to again delay or alter them. Such action will likely be hard-won, as Republicans continue to push to replace the billions in cuts with targeted spending cuts of equal or greater size. On the other side, President Obama continues to call for a combination of spending cuts and new revenue.

If allowed to occur, it’s possible the sequester could cut funding to the Section 1603 energy tax credit cash grant program. In general, sequestration provides an “across the board” 7.6 percent reduction in government spending. In late 2012 the Office of Management and Budget (OMB) produced a sequestration report. The report lists a number of programs that would face cuts because of sequestration using the 7.6 percent rate, including the Section 1603 cash grant program. (For more on this prospect, see The Current in the November 2012 issue of the Novogradac Journal of Tax Credits.) In addition, the sequestration would have significant implications for affordable housing and community development projects funded by U.S. Department of Housing and Urban Development (HUD) programs.

The new March 27 sequestration deadline coincides somewhat ominously with the date that the continuing resolution currently funding all federally funded agencies expires. By March 27, Congress must address fiscal year 2013 appropriations to prevent a federal government shutdown. What is more, in early to mid-February, President Obama must also release his proposed budget for FY 2014. As it has in years past, that proposal could contain several tax provisions related to affordable housing, community development, historic preservation and renewable energy communities, as well as a number of possible changes to HUD funding. However, in the context of the strenuous focus on deficit reduction, watchwords for FY 2013 and 2014 appropriations will include thrift and cutback. (For more on these considerations, see Policy Points on page 10.)

What All This Means for Tax Reform
The growing momentum for tax reform has been chronicled in this space in recent years as lawmakers have released proposals and called for a comprehensive overhaul of the tax code. Last year predictions began to coalesce suggesting 2013 would be the year that real work tax reform would begin. This is in part because 2013 is not an election year, which provides some political cover for lawmakers.

But contrary to early expectations, rather than increasing the prospects of tax reform by putting in place a process to reform the tax code for individuals and corporations, the year-end fiscal cliff negotiations may have complicated tax reform prospects. First, H.R. 8 did not address or merely delayed many issues, as described above. This means the first quarter of the calendar year will be largely consumed by dealing with those leftover items.

In addition, the debate over whether tax reform should be revenue neutral will likely intensify following the tax rate increases included in H.R. 8. Experts expect the GOP will harden its stance on the issue and will only consider new revenue in the context of tax reform as a tool to lower rates. On Jan. 4, speaking on Bloomberg TV, House Ways and Means Chairman Dave Camp, R-Mich., said, “We’ve established the permanent level of revenue the government is going to get,” Camp said. “That’s an absolute in my book.”

As chair of the key tax writing committee, Camp will play a key role in tax reform if it is to occur in the near future. Reports indicate he continues to meet with his Senate counterpart, Finance Committee Chairman Max Baucus, D-Mont., who has also been working toward comprehensive tax reform in recent years.

It is in this setting – fraught with deficit-reduction pressure and ongoing revenue-raising debates – that the tax credit community must reset and turn again to the task of securing extensions of important tax expenditures beyond 2013, such as the 9 percent LIHTC floor, the PTC and the NMTC. And in light of the pace and complexity of 2012’s legislative process, the sooner those efforts are started, the better.

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