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Washington Wire: Super Committee Takes Center Stage

Published by Michael J. Novogradac on Saturday, October 1, 2011

Journal cover October 2011   Download PDF

The Joint Select Committee on Deficit Reduction, also known as the Super Committee, last month began the herculean task of identifying and agreeing on $1.5 trillion in bipartisan deficit reduction measures. At the time of this writing it is considered unlikely that revenue measures will be part of the package; in fact, Republican members of the committee have signed a pledge to exclude new taxes as a part of the final deal, signaling that “net” revenue raising measures are unlikely to be considered. However, a plan could involve some tax cuts that when combined with curtailing or eliminating tax expenditure programs would result in an agreement that did not raise net new taxes. This means changes to tax expenditures such as the low-income housing tax credit (LIHTC), new markets tax credit (NMTC), historic tax credit (HTC) or renewable energy tax credit are not necessarily off the table.

The Super Committee must vote on a plan by November 23 and is required to submit a report and legislative language to President Obama and Congress by December 2. Because of the fast-track nature of the Super Committee, it is imperative that the tax credit community be aware of the group’s work and the possible effects that these efforts could have on the LIHTC, NMTC, HTC and renewable energy tax credits.

Membership
The Super Committee is a unique organization created by the Budget Control Act of 2011. The group is composed of six Democrats and six Republicans, three members of each party from the Senate, and three members of each party from the House.

  • Rep. Jeb Hensarling, R-Texas, co-chair and Republican Conference chairman  
  • Sen. Patty Murray, D-Wash., co-chair and Transportation-HUD Appropriations Subcommittee chairwoman
  • Sen. Max Baucus, D-Mont., Finance Committee chairman
  • Rep. Xavier Becerra, D-Calif., Ways and Means Committee member
  • Rep. Dave Camp, R-Mich., Ways and Means Committee chairman
  • Rep. James Clyburn, D-S.C., assistant Democratic leader
  • Sen. John Kerry, D-Mass., Finance Committee member
  • Sen. John Kyl, R-Ariz., Minority Whip and Finance Committee member
  • Sen. Rob Portman, R-Ohio, Budget Committee member (and former U.S. Office of Management and Budget director)
  • Sen. Pat Toomey, R-Pa., Budget Committee member
  • Rep. Fred Upton, R-Mich., Energy and Commerce Committee chairman
  • Rep. Chris Van Hollen, D-Md., Budget Committee ranking member

First Steps
The Super Committee held its first meeting on September 8, which was focused primarily on setting the rules under which the committee will operate. The meeting also presented an opportunity for lawmakers to make statements. The remarks ranged in tone and length, but one theme could be found in every member’s statement: jobs.

In his opening statement on September 8, Hensarling said, “It should be obvious that deficit reduction and a path to fiscal sustainability are themselves a jobs program.”

Likewise, in her opening statement, Murray also noted the importance of job creation. “There is broad understanding among us that economic growth and job creation are the best ways to reduce the deficit and debt — though we certainly have some real differences regarding how to achieve that,” she said.

Kerry asserted in his remarks that deficit reduction and job creation are inextricable. “We can’t fix our budget without fixing jobs and we can’t fix jobs without fixing our budget,” he said.

Upton similarly set the tone for his approach to the committee’s charge. “Every taxpayer dollar we spend, every program on the books, can be viewed through the lens of job creation and fiscal responsibility,” he said. “Are we spending the people’s money wisely? Are we supporting job growth and economic certainty? Those are the questions, and I look forward to working with my colleagues to find answers.”

Some committee members took the theme a step further and linked job creation to tax reform. Portman said, “Common sense tax reforms can eliminate unjustified tax preferences, and apply those savings to lower, more competitive tax rates that encourage working, saving, and investing. This will increase economic growth and create jobs. By combining spending restraint and pro-growth tax reform, we can both create jobs and pare back the staggering deficits we otherwise face.”

Camp also suggested that tax reform would lead to job creation in his September 8 remarks. “As I stated when I was named to this committee, the final product must be looked at through the prism of job creation — will the recommendations we make help or hurt job creation now and in the future,” he said. “Comprehensive tax reform would spur economic growth and job creation, and should be a part of our discussions.”

Tax Reform and Tax Expenditures
Since the committee’s creation there has been speculation about whether tax reform would figure into the final package deficit reduction measures it presents to Congress.

At the committee’s first hearing on September 13, Van Hollen called for a balanced approach required to reduce the deficit, specifically, “one that contains savings achieved from modernizing certain programs as well as savings gained by simplifying and reforming the tax code in a way that generates revenue.”

During that same hearing, Kerry suggested that tax expenditures should be considered as part of the committee’s work because they could be equated with spending. “It is more than just a ‘spending problem’ narrowly defined, and we do the dialogue a disservice by oversimplifying it: both because if it was a mere spending issue, it’d be a lot easier to solve — but also because many tax expenditures are a form of spending in disguise,” he said.

The sole witness at the September 13 hearing, Congressional Budget Office (CBO) Director Douglas W. Elmendorf, testified that tax expenditures are more similar to entitlement programs than to discretionary spending because they are not subject to annual appropriations and any person or entity that meets the requirements can receive the benefits. Elmendorf’s comments were a gross generalization as many tax expenditures, commonly referred to as “extenders,” including the new markets tax credit, are subject to annual renewal, much like annual appropriations. Also, many tax expenditures cannot be claimed by any person or entity that simply meets the requirements; the LIHTC, tax-exempt bond financing and NMTC are such examples.

The Super Committee held a hearing on September 22 entitled “Overview: Revenue Options and Reforming the Tax Code.” Thomas J. Barthold, chief of staff for the Joint Committee on Taxation (JCT) was the sole witness  at that hearing.

What This Means for Tax Credits
LIHTC
As chairman of the Senate Appropriations Subcommittee on Transportation, Housing & Urban Development, Murray is considered to be a champion of affordable housing. In fact, the Affordable Rental Housing A.C.T.I.O.N. (A Call To Invest in Our Neighborhoods) campaign reports that Murray’s childhood home in Bothell, Wash. was recently recapitalized using the LIHTC, which could make her a potential ally to defend the tax credit. However, the A.C.T.I.O.N. campaign is quick to warn that nothing should be taken for granted.

As such, the A.C.T.I.O.N. campaign is collaborating with state housing finance agencies, local partners in states, and tax committee and Super Committee members to preempt or counter possible threats to the program. In its efforts, the campaign plans to highlight qualities of the LIHTC that distinguish it from other tax credits. That the LIHTC is the nation’s principal affordable housing program and an indispensable financing mechanism for the supply of affordable housing will be a key point of distinction. I have blogged extensively on the topic at novogradac.wordpress.com and Novogradac & Company LLP released a report commissioned by the Housing Advisory Group, subtitled “Assessment of Program Performance & Comparison to Other Federal Affordable Rental Housing Subsidies,” that further demonstrates the distinctions and strengths of the LIHTC program.

Perhaps the most important priority for the campaign will be to highlight the LIHTC’s effect on job creation in communities throughout the country. Fortunately, the facts are on the LIHTC’s side: since 1987, the LIHTC program has supported 180,000 jobs annually, according to the National Association of Home Builders (NAHB). Additionally, according to a report issued by NAHB, the estimated one-year local impacts of building 100 multifamily units in a typical tax credit project include the creation of 151 local jobs.

Tax-Exempt Bond
While not a tax expenditure, it’s important to note that tax-exempt bond financing could also be at risk in the current deficit reduction negotiations. In the deficit reduction proposal he submitted to the Super Committee on September 19, Obama calls for limiting the value of itemized deductions and exemptions to 28 percent for families with incomes of more than $250,000. The provision would apply to interest on municipal bonds, including housing bonds.

Bloomberg reports that according to the Internal Revenue Service, about $32 billion, or 47 percent, of the tax-exempt interest claimed in 2009 was paid to those earning more than $200,000. The Obama Administration estimates this provision would generate $410 billion in deficit reduction over 10 years.

The National Council of State Housing Agencies (NCSHA) warns that the cap, if enacted, could have a significant negative impact on municipal bond investment, because the tax exemption, now worth up to 35 percent for those taxpayers in the highest tax bracket, would be capped at 28 percent. NCSHA notes that the ultimate impact, however, would likely fall not on bond issuers and investors but on the bond programs’ ultimate beneficiaries, including homebuyers and renters, who would bear the cost of higher interest rates.

HTCs
Like the LIHTC, the HTC has a proven track record of creating jobs that gives it considerable advantage in any review of its value. On June 1, the Historic Tax Credit Coalition and Rutgers University released their annual study on the economic impact of the federal historic tax credit (HTC). This year’s update shows that the federal HTC continues to outpace other economic activities such as highway construction, manufacturing and service sector industries in its ability to generate jobs, labor income, taxes and gross domestic product.

The report, based on research conducted by the Rutgers Center for Urban Policy Research, indicates that for the years 2009-2010, $8.8 billion in federal HTC-financed transactions created an estimated 145,100 jobs. In addition, these projects generated $6.2 billion in earned income, $2.3 billion in federal, state and local taxes and $8.4 billion to gross domestic product. The program also continued its remarkable ability to pay for itself. During the last two years, the National Park Service allocated $1.58 billion in tax credits that increased estimated federal tax receipts by $1.6 billion. In its summation of the credit’s impact on the nation’s economy, the Rutgers study described HTC-inspired investment as “stimulus on steroids.”

The HTC’s strong impacts during the past two years, despite the deepest real estate recession in generations, brought the program’s cumulative job totals over the past 33 years to slightly more than two million as a result of the federal government’s investment of $23.4 billion in credits. These credits leveraged $90.4 billion in historic rehabilitation activity.
Clearly, in light of the current focus on deficit reduction, all these figures add up to good news for the HTC community as well as for the industry’s prospects of gaining support for modernization of the Section 47 credit.

NMTC
For the NMTC, set to expire at the end of 2011, the credits’ ability to create jobs will also be paramount. The New Markets Tax Credit Coalition recently released a summary that shows how NMTC investments have been particularly effective in creating construction jobs in economically distressed communities.

Between 2003 and 2009, NMTC investments in construction and substantial rehabilitation of real estate are estimated to total $30 billion. The coalition reports that, according to federal government estimates, $92,000 in financing creates one job. According to the NMTC Coalition’s analysis, that means that approximately 300,000 construction jobs have been created through the NMTC since the program’s inception.

Moreover, the group contends that the federal cost for creation of these jobs is low, because while total NMTC project costs were $30 billion, direct NMTC investment was only $9.7 billion. Using JCT estimates, the NMTC Coalition calculated that the cost to the federal government for the NMTC investment, in terms of revenue forgone, came to $2.4 billion – or $8,000 in revenue forgone per job created.

As the Journal of Tax Credits went to press, the NMTC Working Group was finalizing a paper that demonstrates the cost effectiveness of the NMTC as compared to an equivalent cash grant program.

Energy Tax Credits
The production tax credit (PTC) is set to expire at the end of 2012, and not surprisingly the American Wind Energy Association’s (AWEA’s) top priority is to win an extension of the PTC. Industry paper Recharge reports that AWEA’s public policy head Rob Gramlich considers the PTC extension, like the extension of other tax provisions such as the Bush tax cuts, is “really in a different process” from the work of the Super Committee. Gramlich told Recharge last month that the industry will be looking this autumn for a legislative vehicle to which it can attach a PTC extension.

About 75,000 jobs in the United States are in the wind-power industry, according to Denise Bode, AWEA’s chief executive officer. Bloomberg reported on August 5 that Bode said: “prospects for extension of the program beyond 2012 are as good as ever.”

The solar energy sector also boasts significant contributions to employment. The Solar Foundation announced on September 19 that solar businesses had added 6,735 new workers in all 50 states since August 2010, which represents a 6.8 percent growth rate. According to preliminary data from the “National Solar Jobs Census 2011,” which measured solar employment during the period between August 2010 and August 2011, 100,237 Americans are currently employed by the U.S. solar industry.

“Solar is a job-creating phenomenon in an economy that is flat-lining, with near 7 percent year-on-year increase in the number of Americans working in the industry,” said Danny Kennedy, president of residential solar installer Sungevity and member of The Solar Foundation’s board of directors.

Conclusion
The Super Committee’s task is formidable, the schedule for it to accomplish its work is brief and the stakes for all parties are high. As such, during the coming weeks and months it will be more important than ever for supporters of affordable housing, community development and renewable energy tax credits to communicate the value of these tax credits so they can be allowed to continue contributing to the economy and its recovery.

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