Crunch Time: Advocates Defend Tax Credit Programs as Lawmakers Gear Up for Tax Reform

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In recent testimony and comments to House tax writers, supporters of the federal low-income housing, historic rehabilitation, and new markets tax credits defended these programs and encouraged their continuation under any tax reform legislation.

House Ways and Means Committee Chairman Dave Camp (R-Mich.) wants to pass a tax reform bill this year, as does Senate Finance Committee Chairman Max Baucus (D-Mt.), who will retire at year-end 2014. President Obama also favors tax reform.

Camp, during an April 25th Ways and Means hearing on tax reform and residential real estate, didn’t indicate when his committee might mark up tax reform legislation. But he said, “Tax reform is a critical issue to this Committee, and we remain committed to moving forward in an open and transparent manner.”

Bob Moss, an executive at syndicator Boston Capital and chairman of the Housing Advisory Group, testified at the hearing in support of the low-income housing tax credit program on behalf of Affordable Rental Housing A.C.T.I.O.N., a coalition of more than 450 national, state, and local affordable housing organizations. The National Housing & Rehabilitation Association participates in the coalition.

“Today the housing credit is generally recognized as the most successful housing production and preservation program,” Moss said, asserting that virtually no affordable rental housing would be developed in the U.S. without this incentive.

Moss said the LIHTC program since its inception has made possible the construction or rehabilitation of more than 2.5 million affordable rental housing units. Each year the program generates about 100,000 units, 95,000 jobs, nearly $8 billion of local income, and $1 billion in tax and other revenues for local governments.

He said the housing credit produces high-quality housing units for low-income renter households, many earning earn far less than the program’s income limit of 60% of area median income. The incentive produces housing serving a wide variety of renters – including families, seniors, persons with special needs, veterans, and the homeless.

Moss said the need for affordable rental housing units in the U.S. is great; only 4 in 10 low-income households can find affordable apartments. And he attributed the LIHTC program’s success to several elements. One is the role played by state housing finance agencies in administering the program, which is very flexible; HFAs can customize their qualified allocation plans to encourage housing projects addressing the state’s particular needs and priorities. A second is private-sector involvement and market discipline. The housing credit raises capital from private-sector investors to help fund the construction or rehabilitation of rental developments, and private developers and investors – not the federal government – bear the financial risks.

At the hearing, witnesses for the National Association of Home Builders and National Multi-Housing Council/ National Apartment Association also expressed support for the LIHTC program and urged its continuation. In additional, favorable comments on the LIHTC program and/or LIHTC properties were made by Ways and Means Committee members Pat Tiberi (R-Ohio), Erik Paulsen (R-Minn.), and Richard Neal (D-Mass.).

Several organizations submitted written statements for the hearing record in support of the LIHTC program, including the National Council of State Housing Agencies.

Separately, on April 15th, 11 Ways and Means tax reform working groups concluded accepting comments and suggestions from industry groups and others on various federal tax programs and provisions.

Affordable Rental Housing A.C.T.I.O.N., NCSHA, the Affordable Housing Tax Credit Coalition, Enterprise, and the National Housing Trust submitted written comments to the Real Estate Working Group citing the benefits of the LIHTC program and urging its continuation. The Local Initiatives Support Corporation provided similar comments to the Financial Services Working Group. Some groups urged Congress to not only protect the LIHTC program but also to enhance it by making the minimum 9% credit rate permanent, establishing a minimum 4% rate for non-bond financed acquisition costs, increasing the annual amount of per capita housing credits by 50%, and amending the student rules to allow formerly homeless youth who become students to continue living in tax credit properties.

The Historic Tax Credit Coalition and National Trust for Historic Preservation submitted comments to working groups in support of the federal historic rehabilitation tax credit program and asking lawmakers to “protect and enhance” it.

The New Markets Tax Credit Coalition, Enterprise, and LISC submitted comments in support of the new markets tax credit program.

On May 6, the Congressional Joint Tax Committee issued a report summarizing all of the recommendations made to the 11 working groups. On May 15, the Senate Finance Committee released a tax reform options paper outlining changes to the housing credit, historic credit, and new markets tax credit programs suggested by hearing witnesses, lawmakers, others, and past studies.

(To view Joint Tax Committee publication, go to http://tinyurl.com/ c5vvd3w. For all comments submitted to working groups, go to http://tinyurl. com/cpzdz6b. For Senate Finance Committee options paper, go to http://tinyurl.com/b2qcrqn.)

 

Impact of Tax Reform on LIHTC Returns

Prepared by CohnReznick Tax Credit Investment Services

Some in Washington have suggested that tax reform legislation could cut the top federal tax rate for corporate taxpayers from 35% to 28% or even lower. How would this impact the return on low-income housing tax credit (LIHTC) investments to corporate investors?

LIHTC investors effectively purchase a financial asset comprised of a stream of tax benefits (housing tax credits and losses from depreciation and mortgage interest deductions). The yield from LIHTC investments is generally measured as an after-tax internal rate of return (IRR), which is a function of the amount and timing of delivery of the projected housing tax credits and losses and the amount and timing of the investor’s equity pay-in. Reducing the corporate tax rate would significantly decrease the IRR on LIHTC investments to corporate investors by reducing the value of projected losses.

The table below illustrates how reducing the corporate tax rate from 35% to 28% would significantly reduce the IRR to an investor from a hypothetical 9% LIHTC investment. As a result, in order to maintain the same yield to the investor, the housing tax credit price would have to be reduced and additional soft debt raised. Reducing the corporate tax rate would significantly impact the market demand for LIHTC investments.