Analysis: Tax Reform Proposal Impacts Housing, Economic Development
The House Ways and Means Committee this week released its long-awaited tax reform legislation, the Tax Cuts and Jobs Act (HR 1).
The wide-ranging bill contains provisions that will have potentially significant impacts on housing and economic development activities. While the bill retains the Low-Income Housing Tax Credit (LIHTC), one of only two business credits preserved, it eliminates the New Market Tax Credit, Private Activity Bonds, and the Historic Preservation Tax Credit.
The proposal would make major changes in the nation's incentives for homeownership with changes to the mortgage interest deduction, restructuring deductions for local property taxes, and reducing the need for many taxpayers to itemize.
The text of the bill is available here and supporting documents developed by the House Ways and Means Committee are available here.
What's in the Bill
Low Income Housing Tax Credit
Maintains the credit
The Low-Income Housing Tax Credit is one of only two business credits that was preserved in the bill. Proponents of LIHTC are thankful that Congress recognizes the importance of the credit and thanks them for including it in the bill, but they are still disappointed as it does not provide authorization for the 4 percent credit and it does not include language from Rep. Pat Tiberi (R-Ohio) and Rep. Richard Neal (D-Mass.) that would increase availability for the highly competitive credit and provide several reforms.
Corporate Tax Rate
Cut from 35 percent to 20 percent
New Market Tax Credit
New Market Tax Credits (NMTC) attract private capital to low-income communities by providing federal income tax offsets for investments in housing, schools, and other projects. NMTC leverage $8 in private investments for every federal dollar spending, has created 178 million square feet in commercial space, and has financed over 5,400 businesses. The credit has a proven track record in low-income communities and its loss would be devastating for revitalization efforts in these neighborhoods.
Private Activity Bonds
Private Activity Bonds (PABs) are tax-exempt bonds issued by state and local governments to drive private investments in community development, housing, infrastructure and educational projects. The bill would remove the tax exemption for PABs, which would devastate infrastructure and housing investments in communities across the country. PABs are also required for the use of the 4 percent LIHTC and its elimination would essentially eliminate the 4 percent credit.
Maintains but repeals the ability of issuers to advance refund municipal bonds
Municipal Bonds are the primary tool for financing critical local infrastructure projects. The tax reform proposal leaves in place the current preferential tax treatment for these bonds. However, the bill makes a technical change with significant fiscal impact by eliminating the ability to advance refund outstanding bonds.
Under current law, governmental bonds and 501(c)(3) bonds are permitted one advance refunding. This allows public issuers to take advantage of fluctuations in interest rates to realize considerable savings on debt service, which ultimately benefits taxpayers. In 2016, the advance refunding of more than $120 billion of municipal securities saved taxpayers at least $3 billion.
Historic Preservation Tax Credit
Historic Preservation Tax Credits create incentives for private sector investments in rehabilitation and re-use of historic buildings. The Historic Preservation Tax Credit has leveraged more than $84 billion in private investments to preserve 42,293 historic buildings, allowing communities to preserve important historical landmarks across the country.
Mortgage Interest Deduction
Caps at $500,000 for new mortgages, savings not reinvested in affordable housing
The mortgage interest deduction would be cut in half and apply only on homes up to $500,000. The proposal also reduces the likelihood of most taxpayers using the deduction. The plan nearly doubles the standard deduction resulting in far fewer taxpayers choosing to itemize.
According to the Tax Policy Center, only about 4 percent of those currently using the deduction would continue to do so. The proposal also changes the deductibility of state and local taxes by capping it at $10,000.
Employee Parking and Transit Benefits
Parking and transit benefits provided by employers would be eliminated. The current tax code allows employers to offer a subsidy for parking or public transportation costs. Those benefits would end under the proposed bill. Job-related moving expenses would also no longer be tax deductible, and moving expense reimbursements provided by an employer could not be excluded from the employee's income.
The Ways and Means Committee will begin markup of the bill this afternoon. Debate of the legislation and amendments are expected to last up to four days. Amendments on all of the issues noted above are possible.
Leadership is currently working on changes to the bill to secure votes and ensure procedural passage in the Senate. The President has also urged lawmakers to include a repeal of the individual health care mandate, a move that could politically complicate its passage. Still, House leadership is optimistic that the bill will pass with few Republican defections before Thanksgiving.
The path through the Senate is less clear.
Sen. Rand Paul (R-Ky.) voted against the passage of the budget resolution that included the framework for this tax reform legislation and several other Republican Senators have expressed concern about the bill. However, because the legislation is being moved forward under the budget reconciliation process, only a simple majority is needed to approve the legislation.
Leadership is aiming to have the bill to the President's desk before adjourning for the holiday recess in December.
Top image: House Ways and Means Committee Chairman Kevin Brady (R-Tex.) speaking at the 2017 Conservative Political Action Conference. Wikimedia Commons image by Gage Skidmore (CC BY-SA 2.0).