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Washington Wire: How Will Tax Credits Fare with a Blank Slate?

Published by Michael J. Novogradac on Thursday, August 1, 2013

Journal cover August 2013   Download PDF

The “blank-slate” approach proposed by Senate Finance Committee Chairman Max Baucus, D-Mont., and Ranking Member Orrin Hatch, R-Utah, as a legislative starting point for tax reform is a bold step in the years-long effort to rewrite the tax code. This proposal puts all tax provisions on even footing, at least in theory, as lawmakers consider which tax expenditures and other provisions should be added back to a reformed tax code.

Fortunately for affordable housing, community development, historic preservation and renewable energy tax credit supporters, the low-income housing tax credit (LIHTC), new markets tax credit (NMTC), historic tax credit (HTC) and the investment tax credit (ITC) and production tax credit (PTC) for renewable energy boast successful track records, provide significant contributions to the economy and support important policy objectives. However, in a process of this magnitude, even those strengths are no guarantee of the programs’ futures.

Starting from Scratch
In a “Dear Colleague” letter circulated on June 27, Sens. Baucus and Hatch called on their Senate colleagues to submit legislative language or detailed proposals by July 26 for which tax expenditures and other provisions should be added back to a reformed tax code. In the letter, Sens. Baucus and Hatch write that they “both believe that some existing tax expenditures should be preserved in some form” but that tax expenditures and other provisions should be added back only if they help grow the economy, make the tax code fairer, or effectively promote other important policy objectives.

Under this framework, the Senate Finance Committee will begin its deliberations with a tax code devoid of all tax credits. Senators were given until July 26 to submit proposals to be considered during the crafting of the committee’s bill. Legislators were asked to provide detailed specifications on what they want to retain as well as legislative language if possible. Each tax credit will only be added back to the tax code if enough senators make a compelling case for it and Sens. Baucus and Hatch indicated they will give special attention to proposals that are bipartisan. Accordingly, supporters of various tax expenditures – including the LIHTC, NMTC, HTC, energy tax credits, and tax-exemption for bonds – spent much of last month reaching out to Senators to make a case for retaining those provisions during tax reform.

On July 8, House Ways and Means Committee Chairman Dave Camp and Sen. Baucus kicked off a tour designed to gather public input on priorities for tax reform with visits to two businesses in the Minneapolis-St. Paul, Minn. area. One of those visits was to Baldinger Bakery, a fourth generation, family-run businesses in St. Paul. The bakery was founded in 1888 and has grown into a commercial bakery. The bakery also used a $19 million loan using the NMTC to construct a new 144,854-square-foot state-of-the-art facility. Supporters of the NMTC were heartened by the opportunity to showcase how the NMTC is supporting economic growth and job creation.

Mixed Reactions
Many reactions were supportive of the comprehensive, clean-slate approach. For example, Ways and Means Chairman Dave Camp issued a statement after the announcement saying of the plan, “This significant step forward underscores that the Senate and House are on the same page as they work in a bicameral, bipartisan manner to fix our broken tax code.”

RATE Coalition Co-Chairs Elaine Kamarck, former White House adviser to President Bill Clinton and Vice President Al Gore, and James P. Pinkerton, former White House domestic policy adviser to Presidents Ronald Reagan and George H.W. Bush, sent a letter to the Senate Finance Committee applauding them for their approach to tax reform and their letter to colleagues. RATE is a coalition of businesses, associations and other like-minded groups that joined together to advocate for tax reform. The RATE letter says, “By asking their colleagues to make a case for specific tax exemptions and provisions, Chairman Baucus and Ranking Member Hatch have again shown their determination “to complete tax reform this Congress.’”

However, some were skeptical of the ambitious goal of completing tax reform during the 113th session of Congress, in light of the political realities of the congressional calendar. For example, even if the House Ways and Means Committee members and Senate Finance Committee members each pass their own versions of tax reform legislation this year, some questions have been raised about whether the full House and Senate would be able to vote on either bill before 2014. And because 2014 is an election year, the path toward passage for such large-scale legislation would be that much steeper.

What’s Next
At the time of this writing, the initial deadline for Senators to submit proposals had passed but no information has been made public about what those proposals included. Initial reports suggest that draft legislation could be released as early as this month. But it’s also possible that Senate Finance Committee staff will continue working throughout the month, while Congress is away for its August state and district work period. When Congress reconvenes in September, the Senate Finance Committee is expected to hold a series of hearings and a mark-up of the draft language that is being developed now.

As such, August will remain a pivotal time for the crafting of the Senate Finance Committee’s draft legislation.

The most accessible option for reaching out to your senators and representatives may be to write a letter. Groups such as the ACTION campaign, the Housing Advisory Group, the New Markets Tax Credit Coalition and others have drafted template letters that can be used as a starting point.

In addition, by meeting with lawmakers in person in their district offices or in Washington, D.C., tax credit supporters can share vital information about these important programs. For example, the Novogradac LIHTC Mapping Tool and Novogradac NMTC Mapping Tool can help document the tangible, beneficial results of these programs in urban and rural areas by showing exactly where investments are being made.

To convey the big-picture effects of these programs, a wealth of research is available that chronicles their successful track records. For instance, the report “Affordable Rental Housing After Tax Reform: Calculating Corporate Tax Reform’s Possible Effects on Equity Raised from Low-Income Housing Tax Credits,” describes the projected impact of tax reform on the LIHTC. In addition, “Low Income Housing Tax Credit: Assessment of Program Performance & Comparison to Other Federal Affordable Rental Housing Subsidies,” highlights the remarkable track record of LIHTC-financed properties and the efficiency of the LIHTC program as a whole.

Similarly, the “Historic Rehabilitation Tax Credit Recapture Survey” describes how, because of key characteristics of the historic tax credit such as third-party investors, careful screening of properties, economies of scale and uniform practices, and IRS guidance and enforcement, HTC transactions have experienced very low recapture rates. Likewise, “NMTC Program Outperforms Comparable Cash Grant Program,” a report by the New Markets Tax Credit Working Group, reveals that the NMTC is more efficient than a comparable cash grant program and as the price paid per credit rises so does the efficiency of the NMTC.

Perhaps the most effective way to demonstrate the important results of the LIHTC, NMTC, HTC and energy tax credits is to invite lawmakers to tour a tax credit property in their district. We know from experience that members of Congress who have visited tax credit properties in person are the strongest supporters of the programs. The August state and district work period spans almost the entire month; lawmakers aren’t scheduled to reconvene in Washington, D.C. until September 9. This is an ideal time for in-person meetings and property tours while legislators are in their home states and districts.

There’s Still Time to Speak Up
Even after a draft bill has been released by either the Senate Finance Committee or House Ways and Means Committee, the road to passage will be long. And each step in the process can represent an opportunity to support the LIHTC, NMTC, HTC and energy tax credits and tax-exemption for bonds. In the immediate term, the affordable housing, community development, historic preservation and renewable energy communities should continue actively reaching out to lawmakers.

When congressional hearings begin, there may be additional opportunities to submit comments or written testimony. And following hearings, it will also be important for tax credit experts to refute and rebut any inaccurate or misleading characterizations of beneficial tax credits, such as those made about the LIHTC during the April 25 Ways and Means Committee hearing on tax reform and residential real estate. (For more information, see “Setting Straight the LIHTC’s Stellar Record,” in the June 2013 Novogradac Journal of Tax Credits.)

Tax reform is going to be an ongoing process, and successfully protecting the LIHTC, NMTC, HTC, and energy tax credits will require diligence and dedication.

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