Sign Up For Novogradac Industry Alert Emails

Washington Wire: Tax Reform Old and New

Published by Michael J. Novogradac on Thursday, September 1, 2011

Journal cover September 2011   Download PDF

Public dissatisfaction with tax rates. Televised statements by lawmakers urging reform. Growing scrutiny of tax expenditures and loopholes. Numerous proposals ranging from conservative to radical. Tense alliances and frequent fallings-out.

Surprisingly, I’m not talking about the last few months in Washington, D.C. – though I could be. In fact, I am describing the conditions leading up to the passage of the Tax Reform Act of 1986, and with it the enactment of the low-income housing tax credit (LIHTC).

The Tax Reform Act is widely considered the most substantial modification of the tax code in the history of the income tax. The bill was considered by many as unlikely to succeed. The road to enactment was long and bumpy; more than four years after its first precursor bill was introduced, the Tax Reform Act was ultimately signed into law on October 22, 1986. As we mark the 25th anniversary of the LIHTC—which has endured as the centerpiece of supply-side rental housing solutions since its inception—it’s worth reflecting on the world into which this innovative program was born.

In 1986, the first PC virus, known as Brain, began to spread. The Soviet Union launched the Mir space station. Millions of people participated in Hands Across America, forming a human chain from New York City to Long Beach, Calif., to raise money to fight hunger and homelessness. The Oprah Winfrey Show premiered.

The Long and Winding Road
The first precursor to the Tax Reform Act was actually introduced on August 5, 1982 by Sen. Bill Bradley, D-N.J., and Rep. Richard Gephardt, D-Mo. The Fair Tax Act, as it was called, was the Democrat’s proposal for tax reform and became referred to as Bradley-Gephardt. A year and a half later, on January 25, 1984, President Ronald Reagan in his State of the Union address called for the Treasury Department to conduct a study on the topic of tax reform. On April 26, 1984, Sen. Robert Kasten, R-Wis., and Rep. Jack Kemp, R-N.Y., introduced a Republican proposal for tax reform, sometimes called Kasten-Kemp.

On November 27, 1984 Treasury Secretary Donald Regan unveiled his proposal for tax reform, which was subsequently dubbed Treasury I. It’s important to note that Regan was careful to unveil the proposal as his own—rather than the Administration’s—proposal.

On May 28, 1985 Reagan appeared on national television to endorse tax reform. House Ways and Means Committee Chairman Dan Rostenkowski, D-Ill., followed Reagan and also gave a televised address calling for reform. During his address, Rostenkowski invited the public to send letters of support addressed to “Rosty,” a family nickname. The next day, on May 29, Reagan unveiled his proposal for tax reform, which became known as Treasury II. The “Write Rosty” campaign is reported to have resulted in more than 75,000 responses.

That fall, on October 1, the Ways and Means Committee began drafting tax reform legislation, using a plan drafted by committee staff as a starting point. The committee held 30 days of full committee hearings on tax reform, followed by 26 days of mark-up. Members debated every aspect of the tax code, often provision by provision. On November 23, the committee approved its version of tax reform, without the endorsement of the President.

Tax reform almost stalled when, on December 11, House Republicans used congressional procedure to prevent the Ways and Means-passed bill from being considered. But on December 16, Reagan traveled to Capitol Hill and appealed to GOP leaders to keep tax reform alive. The next day, the House of Representatives passed the Tax Reform Act by a voice vote.

On March 19, 1986, the Senate Finance Committee began drafting a plan for tax reform, using as a starting point a plan created by its chairman Sen. Bob Packwood, R-Ore. The plan wobbled a few times in April 1986, but Packwood emerged triumphant. The Senate Finance Committee stunned lobbyists and lawmakers alike when it approved its tax reform plan by a unanimous vote of 20-0 on May 7.

The Senate began to debate tax reform on June 4. Three weeks later, on June 24, the Senate passed tax reform by a vote of 97-3. On July 17, the House-Senate conference began work reconciling differences between the bills, with Rep. Rostenkowski as chairman. Just one month later, on August 16, the conference report was approved. This was to be the final version of tax reform.

The bill sailed through Congress. On September 25, the House of Representatives affirmed the Tax Reform Act of 1986 by a vote of 292-136. On September 27, the Senate passed the bill by a vote of 74-23 and sent it to President Reagan, who signed it on October 22 in a ceremony on the South Lawn of the White House.

The Low-Income Housing Tax Credit
The Tax Reform Act made sweeping changes to the tax code, including substantial modifications to the historic rehabilitation tax credit (HTC) and renewable energy investment tax credit (ITC) rules. It also created the low-income housing tax credit. In the LIHTC, Congress hoped to establish a low-income housing subsidy that would provide incentives to increase the low-income housing occupancy level and cap the rent that property owners could charge their low-income residents.

Technical corrections were made to the program and the tax credit was extended in subsequent years, though each extension was hard-won and the LIHTC actually expired and had to be retroactively extended. The signing of the Omnibus Budget Reconciliation Act of 1993 ended the seven-year struggle to extend the LIHTC and the program was made permanent. In 2000, the LIHTC cap was increased for the first time since the credit’s enactment in 1986 and the LIHTC was indexed for inflation. In 2005, the LIHTC was featured as a key tool in the Gulf Opportunity Zone Act—illustrating Congress’ understanding of the economic efficiency that the LIHTC public-private partnerships bring to affordable housing development. Significant modifications, including a temporary LIHTC cap increase, were passed in the Housing and Economic Recovery Act of 2008. The LIHTC was again used as a tool in disaster relief in the Midwest under the Emergency Economic Stabilization Act of 2008.

The LIHTC program has been described by the Joint Center on Housing Studies of Harvard University as the “most successful federal affordable housing production and preservation program in the nation’s history.” The LIHTC is also a proven job producer. According to a 2010 study by the National Association of Home Builders, the one-year local impact of building a typical 100-unit LIHTC financed housing development results in 122 jobs related to the construction of property.

Earlier this year, a study commissioned by the Housing Advisory Group (HAG) and authored by Novogradac and Company LLP found that LIHTC-financed properties have a remarkable track record, particularly when compared to the performance of other federal government subsidies of affordable rental housing. The study’s findings substantiate the LIHTC as a model of how the tax code can—and does—benefit society. In fact, the LIHTC was used as a model for the New Markets Tax Credit program, created in 2000.

Everything Old is New Again
The drumbeat of tax reform has been growing louder in recent months. Once again, tax expenditures are the subject of increasing scrutiny. Lawmakers on both sides of the aisle are endorsing a comprehensive tax overhaul as part of the solution to the nation’s fiscal woes. If history is any indication, the process will be lengthy and complex. It will be essential for the low-income housing tax credit community, as well as for supporters of the new markets tax credit, historic tax credit and renewable energy tax credits, to communicate to lawmakers the value of job creation and related economic benefits that these incentives provide. At the very least, the months to come will be interesting.  

In next month’s Novogradac Journal of Tax Credits we will take a closer look at what lies ahead for tax reform, including the role of the Joint Select Committee on Deficit Reduction (also called the Super Committee), and what it all means for tax expenditures.

Learn more about Novogradac's expertise and many services