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Washington Wire: Tax Reform One of Several Significant Issues for New Congress

Published by Michael J. Novogradac on Sunday, February 1, 2015

Journal cover February 2015   Download PDF

When we last saw Congress, it was approving compromise tax-extenders legislation after managing to reach an agreement that left no one fully satisfied–a one-year retroactive extension of more than 50 tax provisions through the end of 2014. They included the 9 percent floor for the low-income housing tax credit (LIHTC), the production tax credit (PTC) for wind and certain other renewable energy sources and the new markets tax credit (NMTC). While it certainly could have been worse for the tax credit community—there were some lawmakers who advocated for no extension—the widely expected two-year extension didn’t happen.

The result was a package that included certain business extenders that largely couldn’t do what business incentives are designed to do: Spur action. With less than two weeks left in the year by the time the bill was signed, there was little time left to significantly alter investment behavior. Indeed, for the LIHTC community, the retroactive extension is likely to have only minor effects, as states had already made substantially all of their allocations underwritten at the floating rate. For NMTC supporters, the one-year extension of the credit was a huge relief: While the hoped-for two-year extension didn’t happen, the NMTC community lived to fight another day and benefited from $3.5 billion in allocation issuance authority that will be awarded in the spring.

Now we watch to see what the 114th Congress will do concerning tax credits, an issue that is anything but clear. With Republicans in control of both houses, tax reform looms large on the horizon and the approach to tax extender legislation is open to interpretation. While some supporters of comprehensive reform want to include extenders in that discussion—eliminating some, making others permanent—others say the best approach is to make a few of the extenders permanent before tax-reform discussion starts, which would change the revenue baseline and thus make it easier to achieve revenue-neutral tax reform. Regardless, most observers don’t expect anything to happen quickly, as Congress possibly begins what will be a months-long process of tax reform.

While the tax-extender issue is on the back burner (until it suddenly becomes a front-burner issue if tax reform, as many predict, fails to advance before the end of the year approaches), several other issues loom large over the 114th Congress.

Tax Reform
Comprehensive tax reform remains, of course, a major issue and one that is expected to get a lot of attention under House Ways and Means Chairman Paul Ryan, R-Wis., and Senate Finance Committee Chairman Orrin Hatch, R-Utah. A draft tax reform bill released last year by outgoing Ways and Means Committee Chairman Dave Camp, R-Mich., was introduced as legislation just before the end of the prior Congress. Ryan told Bloomberg News in December that he considers Camp’s bill more of a “marker,” rather than a starting point, which is potentially good news for the tax credit community, since Camp’s legislation didn’t explicitly repeal or preserve the NMTC and proposed the repeal of the historic tax credit (HTC) and renewable energy tax credits (RETCs). While the bill did preserve the LIHTC, a significant achievement given the fate of most corporate tax expenditures, it also proposed a set of reforms that would substantially reduce affordable housing production.

Meanwhile, President Barack Obama hinted at his year-end news conference that he would be willing to work on a possible overhaul of the tax code, starting with business tax reform, such news received with caution by Republicans, who are aware that Obama can veto any legislation they pass without his involvement.

But tax reform doesn’t happen in a vacuum. A major cloud hanging over it is what kind of conflict surfaces concerning other key issues early in the Congress. Washington insiders expect three of the early Republican legislative priorities to be addressing the President’s immigration executive order, the Affordable Care Act and the Keystone XL pipeline, since they now likely feel they can force the Democrats to the table on those issues. None has much to do with tax reform, but they could result in hard feelings and bad blood that poison the well for legislators trying to create a bipartisan approach to change the tax code. If political hard feelings cause both sides to retrench, that could sideline tax reform for this Congress, since the 2016 presidential election will make it nearly impossible to pass significant legislation next year.

Budget Reconciliation
One key question concerning tax reform is whether congressional Republicans will attempt to use budget reconciliation to make tax reform easier to pass in the Senate. That’s the parliamentary technique that could be used to advance legislation with a budget impact, used by the Republican Congress in 1996 to pass welfare reform legislation ultimately signed by President Bill Clinton. Reconciliation protects budget legislation from filibusters and allows a simple majority to pass legislation in the Senate. It has been used about two dozen times since the early 1980s. To qualify legislation under budget reconciliation, it must only address budget issues and cannot increase the deficit beyond the 10-year budget window.

If Congress attempts entitlement reform, including Social Security, Medicare and Medicaid, it will likely be done through budget reconciliation. That would potentially bring more hard feelings between the parties and make such legislation less attractive to the president. But even with a potential Obama veto hanging over it, Republicans could choose to go this route in 2015 to pass budget legislation implementing their priorities and attempt to show the need for a Republican president—who wouldn’t veto the legislation—starting in 2017.

One further budget issue facing the affordable housing community is the change to calendar-year funding for U.S. Department of Housing and Urban Development (HUD) Project-Based Section 8 funding. While the switch to funding based on a regular calendar year, rather than when contracts expire throughout the year, appears to be an accounting shift, there are real-world funding issues. For contracts to receive a full 12 months of funding in fiscal year (FY) 2016, Project-Based Section 8 will require a huge bump in funding, last estimated at about $1.6 billion. Given the very tight overall discretionary budget, it will be difficult for Congress to approve that increase, so if it doesn’t–or provides full funding of Project-Based Section 8 paired with substantial cuts in other housing programs–would be a blow to the affordable housing community.

Fiscal Deadlines
Hovering over all financial discussions for this Congress are a series of fiscal deadlines. The first is the debt limit, which faces the end of a temporary suspension March 15. On March 16, all of the federal debt accumulated since the temporary suspension was enacted last year will be automatically added to the old debt limit to form a new debt limit. Given the use of some intragovernment payments and other accounting measures, combined with the April 15 individual tax filing deadline that provides an influx of tax revenue, the U.S. Treasury may be able to delay dealing with the debt ceiling for a few months. But by late summer it will likely be faced with raising the debt ceiling, always a contentious issue.

The second deadline comes at the end of March, when Congress must address the Medicare Sustainable Growth Rate, which covers how much Medicare doctors are reimbursed by the government. The Balanced Budget Act of 1997 reduced this amount, but there have been regular temporary agreements since then to restore a higher reimbursement rate. Now, after 17 years, Congress may attempt to permanently fix the rate. The most recent Congress appeared to have a deal to permanently settle the issue, but in the end, it couldn’t gain agreement on a long-term solution. We’ll see this year whether the Congress settles this issue or again passes a short-term patch, but one way or another Congress will likely take action before the deadline expires.

The final key deadline is the Highway Trust Fund, which needs a long-term solution before it expires May 31, just in time for the summer travel season. As revenue from the federal gas tax has failed to reach the amount needed to finance projects authorized by the federal surface transportation bill, Congress has delayed a permanent solution for this for years, instead authorizing temporary transfers of funds from general revenues. However, the Budget Control Act of 2011, which implemented sequestration starting in 2013, made it more difficult to make such transfers, and the last temporary patch was financed by delaying pension contributions. The last federal gas tax increase was 1993, and gas prices are currently fairly low, so that’s one possibility to cover the revenue, but whether enough Congress members can stomach voting for a tax increase on a pocketbook issue is to be seen.

Sequestration–the automatic spending cuts to the federal budget–didn’t go away after 2013. It went into hibernation, from which it could emerge this year. The Bipartisan Budget Act of 2013, brokered by then-Senate Budget Committee Chairwoman Patty Murray, D-Wash., and then-House Budget Committee Chairman Paul Ryan provided $63 billion in budget “relief,” applied over two years and gave a temporary reprieve. That ends with the FY 2015 budget, meaning that barring a new budget deal, sequestration will return.

If that happens, strict budget caps on domestic discretionary spending will be imposed, which could have a significant effect on housing programs, particularly HUD. The “deadline” for a new FY 2016 budget resolution is technically April 15, but that has habitually been bypassed in recent years as Congress has often been unable to pass a budget resolution. Ultimately, though, the lack of a budget resolution in recent years won’t prevent its Republican-promised return.

Bipartisan or Partisan?
Perhaps the biggest question facing Congress is whether the two parties will work together or continue the trend of the past several years and dig in along partisan lines. On one hand, the looming presidential election–with no clear-cut favorite – could result in the Republican Congress and Democrat president refusing to compromise while they wait for the next election. The Democrats are well aware that more Senate Republicans face the electorate in 2016, when 24 of the 34 contested Senate seats are controlled by the GOP, and many of those seats are in states favorable to Democrats. It’s similar to the Democrats’ position last November, when 21 of the 35 seats up for election were held by their party, often in red state territory. That could result in a Republican Party more willing to work with the Democrats in an effort to appeal to the electorate as bipartisan. And Obama, looking at his legacy, may attempt to strike some deals that he has previous eschewed.

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