In a victory for the affordable housing industry, low-income housing tax credits (LIHTCs) and private-activity bonds (PABs) are preserved in the tax reform bill released Friday. The much-anticipated legislation heads to a vote next week.
“While we didn’t get everything we wanted, and whoever does, we’re whole,” says David Gasson, executive director of the Housing Advisory Group and vice president at Boston Capital.
Except for a cut in the corporate rate, affordable housing fared well compared to many other industries, according to Gasson.
The biggest threats to affordable housing were fended off in the days leading up to a final bill.
The legislation firmly rejects an earlier House proposal that would have eliminated PABs, a move that could have reduced affordable housing production by an estimated 800,000 over the next 10 years.
It also omits an amendment by Sen. Pat Roberts (R-Kan.) that would have removed artists from a list of qualified groups that can benefit from LIHTC housing and another amendment that would have provided a mandatory basis boost for LIHTC projects in rural areas. The issue with the boost was that it would have been paid for by reducing the basis boost on all projects from 30% to 25%.
Housing advocates were also concerned about the Base Erosion and Anti-Abuse Tax provision that could have derailed tax credit investors with foreign parent organizations or U.S.-based investors with significant foreign operations from investing in community development tax credits. However, the final bill mitigates those concerns by allowing 80% of the housing credit to be used against the BEAT.
Michael Novogradac, managing partner at Novogradac & Co., was among the many people reviewing the bill Friday.
"Huge sense of relief," he says. "We were playing defense virtually the entire time as community development tax incentives were under full assault. These incentives didn’t come out unscathed, but they all survived, with varying degrees of damage. The one bright light was the creation of Opportunity Zones. We are excited about the possibilities created by this new designation and how it will target capital to distressed areas."
The Opportunity Zones aim to incentivize investments in distressed communities through capital gains deferrals.
Although housing advocates are breathing a little better, an area of concern remains the reduction in the corporate tax rate. The bill calls for the rate to be reduced from 35% to 21%, a move that could diminish the value of the housing credit for investors and reduce investment in housing credits.
Industry leaders believe there will be an adjustment period, but the market will find its footing at the lower rate.
LIHTC supporters will continue to pursue proposals to compensate for the effect of lower corporate rates and support the provisions in the Affordable Housing Credit Improvement Act (S. 548 and H.R. 1661) introduced by Sens. Maria Cantwell (D-Wash.) and Orrin Hatch (R-Utah) and Reps. Pat Tiberi (R-Ohio) and Richard Neal (D-Mass.), says Peter Lawrence, director, public policy and government relations, at Novogradac.
Gasson attributes the overall positive outcome to the advocacy work of developers and housing advocates. For years, they've been calling and meeting with lawmakers to discuss the importance of affordable housing and the housing credit.
The grassroots effort helped when earlier challenges surfaced but none like this year with tax reform.
“This was the moment more than anything,” Gasson says. “It was this tax bill that those personal relationships that have been developed at the local level made all the difference in the world.”
The bill also retains the New Markets Tax Credit through 2019. On historic tax credits, the bill eliminates the 10% non-historic credit, and the 20% credit would be taken over five years.
More work to do
Although the preservation of LIHTCs and bonds in the final bill is a win, it can also be seen as maintaining the status quo rather than expanding needed housing programs. Advocates say more work is needed.
“While the preservation of the LIHTC and PABs avoids an immediate devastating impact on affordable housing, this bill will exacerbate our country’s already yawning income inequality and will harm efforts to end homelessness and housing poverty," says Diane Yentel, president and CEO of the National Low Income Housing Coalition. "Sixty-four percent of the bill’s benefits go to the top 1% of earners, at a cost to the country of over $1 trillion. The increased deficits created by paying for these tax cuts for already wealthy individuals and corporations puts the National Housing Trust Fund under immediate threat of cuts, and threatens deep reductions to spending for other vital housing and community development programs down the line.”
Other industry representatives also issued statements, and more analysis will be coming in the days ahead.
Keeping the LIHTC and bonds in the tax code was the right choice, but the unintended negative consequences of the tax bill for rental and homeownership opportunities need quick action by Congress, adds Ethan Handelman, acting CEO of the National Housing Conference (NHC).
“The next agenda item needs to be the bipartisan technical corrections bill that so often follows sweeping legislation," he says.
The NHC said "ensuring that the LIHTC can go as far as possible to create and preserve rental housing, expanding the total amount of tax credit authority, and maintaining a strong base of investors willing to provide up front capital for affordable rental housing are all needed steps. Most of these steps have already been detailed in the Cantwell-Hatch Affordable Housing Credit Improvement Act (S. 548 and companion bill H.R. 1661)."
