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Washington Wire: Obama’s Final Budget Includes Plenty for Tax Credit Community

Published by Michael J. Novogradac on Tuesday, March 1, 2016

Journal cover March 2016   Download PDF

For affordable housing and community development, President Barack Obama’s budget proposal for fiscal year 2017 (FY 17) was highlighted by a slight increase in discretionary spending and $48.9 billion for the Department of Housing and Urban Development (HUD) when he released it Feb. 9. Those proposals are described in more detail on page 8. In addition to those spending requests, the budget proposal called for a number of important changes to tax incentives for affordable rental housing, community development and renewable energy.

Included in Obama’s proposal were some significant changes to reform and expand the low-income housing tax credit (LIHTC), as well as permanence for the new markets tax credit (NMTC), renewable energy investment tax credit (ITC) and production tax credit (PTC). While the most of the ideas weren’t new–it’s the fourth time Obama proposed permanence for the NMTC, for instance–they showed a continuing commitment to support and expand the credits.

Next, of course, comes getting the proposals through Congress, a process that got off to a rough start when the Republican-controlled House and Senate budget committees announced they wouldn’t even listen to U.S. Office of Management and Budget (OMB) Director and former HUD Secretary Shaun Donovan deliver testimony on the request. The combination of a Congress that’s not on his side, 2016 being a presidential election year and the final year of his presidency cast a dramatic shadow over Obama’s final budget proposal. Individual annual spending bills have rarely passed in time for the beginning of the fiscal year on Oct. 1, but rather there’s usually a series of continuing resolutions to allow the government to be funded on a short-term basis, until a longer term spending bill is enacted. In fact, several political realities leave most observers cynical about the Obama budget’s chances.

The budget proposal is still significant, since it indicates the priorities of the administration, and because, aside from a few high-profile programs, the funding levels are little changed in the annual spending bills. Before we get into the political landscape, here’s a look at the major components in the Obama administration’s FY 17 proposal for the LIHTC, NMTC, PTC and ITC.

LIHTC: Expansion, Reformation

Obama’s proposal included several changes to the rules governing the LIHTC, which marks its 30th anniversary this year. It’s been permanent since 1993, leaving the federal government in the role of tweaking rules and regulations over the past 23 years.

The most significant changes to the LIHTC program in the president’s budget proposal, and one included in last year’ s budget proposal, is to allow states to convert up to 18 percent of their private activity bond (PAB) volume cap into the authority to allocate additional 9 percent LIHTCs. If all states converted the maximum amount possible, it would increase LIHTC authority by about 50 percent. It also proposes allowing a building to qualify for 4 percent LIHTCs if it receives an adequate allocation of tax-exempt volume cap without needing the PABs to be issued–a proposal that would reduce transaction and financing costs for such developments.

OMB estimated the cost of each tax proposal; of the projected cost of $9.59 billion over 10 years for all of the administration’s LIHTC proposals, the PAB proposals make up $9.44 billion–more than 98 percent.

Another repeat proposal would allow developments to comply with a new income-averaging rule for LIHTC eligibility, as long as at least 40 percent of units are reserved for households at an average of 60 percent of the area median income (AMI), with no households having an income greater than 80 percent of the AMI. The average would be for an entire property, rather than for each building in a development. This change would allow mixed-income units to comply with income-average rules for LIHTC eligibility. The biggest winners under this proposal are likely properties in areas with high housing cost, meaning residents earning slightly more than half the AMI could help subsidize housing for those earning less than 40 percent of the AMI. It would also help rural areas, where low populations and very low AMIs make it more difficult to achieve the correct income mix in affordable properties, and low-income community revitalization, where bringing households at up to 80 percent AMI would help bring greater economic diversity to troubled areas.

The administration also proposed that rehabilitation projects that receive ongoing subsidies administered by HUD or the U.S. Department of Agriculture could permit certain tenants whose incomes were more than 60 percent AMI but less than 80 percent AMI to remain without jeopardizing LIHTC assistance for that unit, as long as they were income-qualified when they moved in to the property.

For the first time, the Obama administration budget proposal includes a requirement that states’ qualified action plans (QAPs) include a fourth preference to allocate LIHTCs in a manner that affirmatively furthers fair housing. If enacted, this preference would join preferences for development proposals that serve the lowest income tenants, would offer the longest affordability and contribute to a concerted community revitalization plan. As proposed in previous budget requests, the preservation of federally assisted affordable housing would be added to the selection criteria for LIHTC allocation, becoming the 11th criterion that state housing agencies must include in their QAPs.

As requested in last year’s budget submission, the proposal also would allow HUD to design as a qualified census tract (QCT) any tract that meets certain criteria for poverty or low-income households. That covers areas with poverty rates at 25 percent or more, where the tract median income is at 60 percent or less of the AMI. The Obama administration proposal removes a limit under current law that restricts the aggregate population in census tracts to less than 20 percent of the metropolitan area’s population and would modestly expand the number of QCTs, increasing the potential value of the LIHTCs allocated, since the QCT designation allow properties to receive up to 30 percent more LIHTCs than otherwise would be available.
Finally, the proposal, as in previous requests, would add protection for victims of domestic violence as a mandatory provision of long-term agreements required between each LIHTC taxpayer and the state.

NMTC: Permanence, Plus a New Credit

For the fourth consecutive year, Obama’s budget proposed making the NMTC permanent at a $5 billion level, a significant jump over the current five-year, $3.5 billion-per-year level that was part of the year-end Protecting Americans from Tax Hikes (PATH) Act. It also would allow NMTC amounts from qualified equity investments made after Dec. 31, 2019, to offset alternate minimum tax liability.

In addition, the administration for the fourth straight year proposed a new tax credit, the Manufacturing Communities Tax Credit (MCTC). It would have a $2 billion annual cap for investments in communities that suffered major job loss events from the loss of manufacturing facilities or base closures. The MCTC would be structured like the NMTC.

OMB estimates that the NMTC provisions would cost $5.3 billion over a decade, while the MCTC would have a price tag of $4.9 billion over that period.

RETCs: Expansion, Changes

Much of the renewable energy tax credit (RETC) world breathed a sigh of relief in December when the PTC was extended for five years through 2019 and the 30 percent ITC was extended through 2021. The Obama administration proposed more major changes, including permanence for the PTC and ITC, refundability for PTC, as well as extensions for several lower-profile RETCs that are scheduled to expire at the end of this year. And while the budget proposal was roundly dismissed by Republicans upon its release, the renewable energy provisions it includes were a welcome signal of continued support by the administration.

The administration budget also proposed an additional $2.5 billion in credits under the Section 48C advanced energy manufacturing tax credit created by the American Recovery and Reinvestment Act. It increases, modifies and permanently extends the Section 179D deduction for energy-efficient commercial building properties, with an increase from $1.80 to $3 per square foot for improvements meeting updated efficiency standards. The administration also proposes to modify and extend the credit under Section 45L for new energy-efficient homes that are three stories or less.

OMB puts the combined cost of the RETC changes at $31.7 billion over a 10-year period.

Politics of Budgets

The administration budget proposal is really an advisory document, telling Congress what the president thinks the budget should be and what is the appropriate funding level for each program. It’s up to Congress to pass its own budget resolutions, with a mid-April deadline that’s generally been ignored, followed by (in theory), an agreement on the 12 annual spending bills that’s sent to the president before Oct. 1.

Except that rarely happens on schedule. What actually happens is that Congress sometimes passes a budget resolution, then creates a dozen spending bills and (hopefully) passes each one, staying within the framework of the overall budget. If one or more of those annual spending bills aren’t passed by Oct. 1, then Congress passes temporary stop-gap funding resolutions to keep the government running until a full-year spending bill—usually an “omnibus” spending bill—is enacted. The last time Congress agreed on a budget resolution and passed all individual annual spending bills before Oct. 1 was 1994. The fact that this is a presidential election year makes that outcome unlikely in 2016.

We’ll likely spend the next several months with competing ideas on how the government should spend its money as we gain clarity on frontrunners to be the next president. Other political hot buttons also often interfere–as we learned in mid-February when Supreme Court Justice Antonin Scalia died, leaving an opening on the high court that will be the focus of much political spotlight.
In the end, the administration budget is a map and symbol for the outgoing administration: It tells us how Obama thinks the national spending should go, with suggestions on how to get there.

It’s up to Congress to determine whether it wants to follow that map or another.

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