Washington Wire: Tax Extenders, Omnibus Legislation Provide Rare Certainty for Tax Credit Community

Published by Michael Novogradac on Friday, January 1, 2016
Journal thumb January 2016

When House and Senate leaders announced their tax extenders and omnibus spending bills in mid-December, the tax credit community got a rare gift: a strong degree of certainty, which was a big change from recent year-end legislation.

Key Tax Credits Extended

After months of talks and weeks of serious negotiations over tax extenders and spending, Congress struck a pair of deals less than two weeks before Christmas that provided rare midterm certitude for several tax credits:

  • The minimum 9 percent low-income housing tax credit (LIHTC) applicable percentage for federally unsubsidized developments was made permanent. However, the bill does not include a provision to establish a minimum 4 percent for LIHTC used to finance the acquisition of existing property.
  • The new markets tax credit (NMTC) was extended five years at $3.5 billion in allocation issuance authority per year through 2019. A provision that would have indexed the NMTC for inflation was rumored to be under consideration, but did not make the final bill.
  • The renewable energy investment tax credit (ITC) and production tax credit (PTC) were extended with gradual phase-downs.

It was the same year-end tax extenders dance we’ve seen over and over, but with a different outcome. Unlike recent years, when Congress pushed decisions down the road by instituting short-term extensions, the late-2015 legislative measures provided midrange stability.

The provisions came in separate, but related bills announced hours apart Dec. 15-16. The first was a $622 billion extenders bill (called the Protecting Americans from Tax Hikes Act of 2015) that included the provisions for the LIHTC 9 percent applicable percentage and NMTC extension. It included some other significant items:

  • Making permanent the military housing allowance for LIHTC income qualification for personnel stationed at or near certain military bases.
  • Extending bonus depreciation through 2019 at 50 percent for the first three years, phased to 40 percent and 30 percent over the final two years.
  • Extending the section 45L credit for energy-efficient new homes in buildings of three stories or fewer that are acquired before Jan. 1, 2017.
  • Extending the section 179D energy-efficient commercial and multifamily buildings deduction for buildings of four or more stories for improvements based on the updated standard for American Society of Heating, Refrigeration and Air Conditioning Engineers (ASHRAE) that are placed in service before Jan. 1, 2017.

The tax extenders legislation also included a two-year extension of the PTC, but that became became moot when the 2016 Consolidated Appropriations Act of 2016 was announced hours later with new renewable energy tax credit extensions. The omnibus legislation was a $1.1 trillion bill to fund the government through the end of September 2016 and included:

  • A five-year phasedown of the PTC, with the credit dropping by 20 percent each year starting in 2017 and an expiration date of 2020. The applicable percentage is based on the year that projects start construction and developers will have the option to claim the 30 percent ITC in lieu of the PTC at the same declining percentage.
  • A five-year extension and phasedown of the ITC, remaining at 30 percent for projects under construction through the end of 2019, then dropping to 26 percent in 2020 and 22 percent in 2021 before the 30 percent ITC expires in 2022. The 10 percent ITC would remain unchanged in the code.
  • An extension of the temporary credit for solar residential energy-efficient properties at the same rate as the ITC.

Beyond the Tax Credit Community

While the bills were big news for those in affordable housing, community development and renewable energy communities, both pieces of legislation had considerable additional significance. The extenders bill included more than 50 items, including changes and permanency for the research and development tax credit, the enhanced child tax credit and the earned income tax credit.

The omnibus legislation was also sweeping, with much of the immediate focus on a delay in the “Cadillac tax” for Obamacare, the lifting a 40-year ban on domestic crude oil exporting and a change in the so-called Visa Waiver Program. The omnibus bill also provided $950 million for the U.S. Department of Housing and Urban Development (HUD) HOME program–resurrecting it after the Senate virtually proposed eliminating it in July–while not, as feared, taking any money from the National Housing Trust Fund. The spending bill also provided $19.6 billion for Housing Choice Voucher program and $10.6 billion for project-based rental assistance.

How the Deal Developed

Ultimately, Congress avoided having to scuttle plans originally made a little more than 12 months earlier when former House Ways and Means Committee Chairman David Camp, R-Mich., worked with then-Senate Majority Leader Harry Reid, D-Nev., and Sen. Chuck Schumer, D-N.Y., to attempt to make certain extenders permanent in 2014. This year, Speaker Paul Ryan, R-Wis., current Ways and Means Committee Chairman Kevin Brady, R-Texas, Senate Finance Committee Chairman Orrin Hatch, R-Utah, Sen. Ron Wyden, D-Ore., Reid and Schumer worked to settle the tax credit discussions. That they reached an extenders deal is saying something, since there were several times as Washington prepared for its winter break that hopes for a major year-end agreement faded. Lawmakers squabbled over which of the dozens of expiring provisions should be made permanent, which should be temporarily extended and which should expire. They also debated whether to make the extender package a part of the omnibus bill or to attempt to pass it separately.

Unrelated political issues intervened: some Republicans claimed that Congressional Democrats were trying to force them to withdraw “riders” to the original spending bill, including those placing limitations on the ability of Syrian and Iraqi refugees to enter the country and a rollback of some regulations required by the Dodd-Frank Wall Street reform law of 2010. They insisted that Democrats were using the deadline and need for a bill to continue government funding to weed out the proposals they opposed.

A week before the deadline, Brady proposed a fallback plan that was familiar to those in the tax credit world: an amendment to existing legislation that included two-year extensions for many tax credits. The idea was to have a blueprint for extenders in case the bigger-picture plan to make some of the credits permanent faltered once again.

Brady’s proposal included extensions through the end of 2016 for the PTC, NMTC and 9 percent LIHTC floor. In short, the proposed bill looked a lot like the legislation Congress approved in the past few years. Fortunately for the tax credit community, it wasn’t needed because Washington broke out of its familiar tax extenders dance.

What Now?

Now we have permanence for the 9 percent LIHTC floor and longer-than-usual extensions for the NMTC, ITC and PTC. So what’s next? One conclusion is that the tax extender and omnibus legislation will serve as the framework–and possibly the kickoff–to wider tax reform discussions. With the “baseline” for tax revenue adjusted by the permanent extensions of previously temporary provisions, comprehensive tax reform becomes somewhat easier. Congressional leaders have talked for years about a desire for substantial tax reform and for most of that time, the discussions have been interrupted with annual or biannual negotiations on short-term extensions. With so many provisions now settled for the foreseeable future, it will be interesting to see how Washington approaches wider tax reform.

Will a clean table mean that leaders can get down to the nitty-gritty on larger reform issues? Or will the fact that these issues are settled make it less urgent? And with a presidential election coming this year, will all the substantive issues be put on the sidelines until we know which party controls the White House?’

As we begin 2016, the immediate future of tax reform is unclear. But in a world of unpredictability, the mid-December agreements gave us something new: a degree of certainty about the LIHTC, NMTC, PTC and ITC that we haven’t had for years, if ever.