Housing advocates may be on the defensive this year if deficit-reduction efforts gain traction because housingrelated tax incentives ranging from the low-income housing tax credit (LIHTC) to the home mortgage interest deduction could be targets.

Erskine Bowles and Alan Simpson, co-chairmen of the deficit reduction commission appointed by President Obama, came up with a sweeping proposal for about $4 trillion in reductions by 2020 that includes the elimination of most tax expenditures, including the housing tax credit.

Tax expenditures are the special deductions, exclusions, and credits in the Internal Revenue Code that are aimed at encouraging certain types of social and economic activity, such as the development of low-income housing.

While specific tax expenditures often come under fire—the housing tax credit, for example, has been criticized as an expensive alternative to direct subsidy programs— they generally survive because supporters are more focused and more determined than opponents.

This time, however, things could be different because of the perceived nature of the threat and the proposed solution.

Ironically, the housing tax credit could be in more jeopardy precisely because no one is pointing a finger at it—the credit wasn't even mentioned in the Bowles- Simpson report. As a result, if there is a concerted effort to eliminate most or all tax expenditures as part of a broad deficit reduction plan, affordable housing advocates may have a hard time pushing for special treatment for the housing credit.

By comparison, Bowles and Simpson did recognize the special status of the mortgage interest deduction, offering an option that would reduce, but not eliminate, the tax break for homeowners.

Under that option, the mortgage interest deduction would be converted to a 12 percent tax credit on up to $500,000 in interest on the mortgage on a principal residence. No credit would be allowed for interest on second-home mortgages or home equity loans.

The odds are still against adoption of such a sweeping plan, and Bowles and Simpson failed to get the 14 votes from the 18-member commission that would have mandated action on their proposal.

Nevertheless, they did get 11 votes from representatives of both parties, and Obama has also promised to put forward a serious deficit-cutting program.

Accordingly, prospects for radical action can't be dismissed out of hand.

While considering long-term deficit-reduction options, the 112th Congress will also have to fund the government for the rest of fiscal 2011, which ends Sept. 30.

Before adjournment, the last Congress approved a continuing resolution to keep agencies operating through March 4, with most programs funded at their fiscal 2010 levels. The Republicans are expected to use their new control of the House to push for spending cuts for the remainder of the year and in fiscal 2012.

Tax bill doesn't include credit exchange extension

The tax bill pushed through Congress in the final days of the lame duck session included some housing-related provisions, but an extension of the Tax Credit Exchange Program wasn't one of them.

Both houses had previously approved extender bills that would have extended the credit exchange program for a year, allowing state agencies to swap a portion of their calendar 2010 tax credit allocations for Treasury grants to support low-income housing developments.

However, the credit exchange provision was dropped from the final legislation, whose centerpiece was a two-year extension of the Bush individual tax cuts for all taxpayers. While there is some disagreement within the tax credit industry about the continuing need for credit exchange, there may be an effort in the new Congress to revive it for 2011.

Another casualty was funding for the national affordable housing trust fund. Earlier versions of the extender legislation approved by the House and Senate included $1 billion to start the operation of the trust fund, but the money was left out of the final bill. The trust fund is supposed to be financed through contributions from Fannie Mae and Freddie Mac, but those contributions have been suspended because of their financial troubles.

The tax bill did extend the New Markets Tax Credit program for two years, with annual investment allocations of $3.5 billion for 2010 and 2011. The legislation also included a one-year extension, through Dec. 31, 2011, of the placed-in-service deadline for Gulf Opportunity (GO) Zone LIHTC projects, the increase in the rehabilitation tax credit percentages for GO Zone developments, and the deadline for GO Zone bonds.

Congress passes bills to reform Secs. 202, 811 programs

In addition to the tax bill, Congress also used the extra time of the lame duck session to pass separate bills reforming the Sec. 202 elderly housing program and the Sec. 811 program for housing for the disabled.

The Sec. 202 bill expands the current provisions on the prepayment and refinancing of loans to allow the existing loan to be subordinated or assumed when new financing is provided.

To prevent the displacement of tenants when a Sec. 202 project is refinanced or recapitalized, the legislation authorizes senior rental preservation rental assistance contracts, which will provide subsidies comparable to Sec. 8 for at least 20 years.

The Sec. 811 bill provides for delegated processing by state and local agencies when projects receive a combination of capital advances and other funding for project development. A delegated processing system is already in place for the Sec. 202 program.

The bill also eliminates the tenantbased rental assistance component of the Sec. 811 program, with aid to be provided instead through the Sec. 8 voucher program.

In addition, the legislation provides for the financing of Sec. 811 developments with a combination of projectbased rental assistance and capital funding from other sources, such as LIHTCs.

These projects won't be eligible for Sec. 811 capital advances.

Barry G. Jacobs is editor of Housing and Development Reporter, the nation's premier source for in-depth, factual coverage of all aspects of affordable housing and community development. The two-part publication includes informed reports and insightful analyses in “HDR Current Developments,” and an up-to-date compilation of essential documents in the “HDR Reference Files.” Jacobs is also the author of the annually updated HDR Handbook of Housing and Development Law. For more information, call (800) 723-8077.