Update: Among Top Ten Housing Tax Expenditures Only 3% Goes to LIHTC

Last week I reviewed the amount of housing-related tax expenditure cost that goes to the low-income housing tax credit (LIHTC), based on data for fiscal year 2009. Because of the market disruption at the end of the last decade, and the resulting enactment of the Section 1602 LIHTC cash grant exchange program, some have wondered if the 2009 numbers were a fair representation. 

So here I’ve updated the analysis using fiscal year 2011 data that was included in the Analytical Perspectives document that accompanied the proposed FY 2013 Budget of the United States Government. Based on the 2011 data, the low-income housing tax credit is the sixth largest housing-related tax expenditure in the tax code.

Even though the dollar amount associated with the LIHTC in FY 2011 is double that of FY 2009, and it moved up two spots in the cost ranking, the LIHTC is still a small tax expenditure relative to other housing-related tax expenditures. Of the 10 largest housing expenditures, by dollar cost, the LIHTC is only 3%.  By contrast, the five largest housing-related tax expenditures combined represent 93% of the ten largest housing-related tax expenditures in FY 2011.

Here are the top 10:

 

Housing Related Tax Expenditures	FY 2011 ($ millions)
Deductibility of mortgage interest on owner-occupied homes	$72,240
Exclusion of net imputed rental income	$46,950
Deductibility of State and local property tax on owner-occupied homes	$23,210
Capital gains exclusion on home sales	$15,060
Exception from passive loss rules for $25,000 of rental loss	$11,080
Credit for low-income housing investments	$6,150
Credit for homebuyer	$2,400
Discharge of mortgage indebtedness	$1,370
Exclusion of interest on owner-occupied mortgage subsidy bonds	$1,060
Exclusion of interest on rental housing bonds	$900

Among Top Ten Housing Tax Expenditures Only 2% Goes to LIHTC

According to fiscal year 2009 data included in the Analytical Perspectives document that accompanied the proposed FY 2011 Budget of the United States Government, the low-income housing tax credit is the eighth largest housing-related tax expenditure in the tax code.

However, that rank is misleading when one considers the low-income housing tax credit’s size relative to other housing-related tax expenditures.  Of the 10 largest housing expenditures, by dollar cost, the LIHTC is only 2%.  Here are the top 10:  

Housing Related Tax Expenditures	FY 2009 ($ millions)
Deductibility of mortgage interest on owner-occupied homes	$79,400
Deductibility of State and local property tax on owner-occupied homes	$29,010
Exclusion of net imputed rental income	$27,040
Capital gains exclusion on home sales	$23,500
Credit for homebuyer	$9,730
Exception from passive loss rules for $25,000 of rental loss	$6,020
Accelerated depreciation on rental housing (normal tax method)	$3,860
Credit for low-income housing investments	$3,800
Exclusion of interest on owner-occupied mortgage subsidy bonds	$960
Exclusion of interest on rental housing bonds	$810

The five largest housing-related tax expenditures all support homeownership and combined represent 91 percent of all housing-related tax expenditures in FY 2009.

Compared to these five expenditures, the low-income housing tax credit is significantly smaller.

Top Five Housing Tax Expenditures	Size Relative to the LIHTC
Deductibility of mortgage interest on owner-occupied homes	21 times larger
Deductibility of State and local property tax on owner-occupied homes	7 ½ times larger
Exclusion of net imputed rental income	7 times larger
Capital gains exclusion on home sales	6 times larger
Credit for homebuyer	2 ½ times larger
Total of Top Five Housing Tax Expenditures	44 ½ times larger

CDFI Fund to Update NMTC Eligibility Criteria

On March 7 the Community Development Financial Institutions (CDFI) Fund announced the approximate timing for its plans to update program eligibility criteria based on new poverty and income data that was released in December from the 2006-2010 American Community Survey (ACS).

The CDFI Fund says it expects to release in May new tables showing New Markets Tax Credit (NMTC) program eligibility by Census tract, but notes that this timing may be subject to change. In the meantime, eligibility for the NMTC program remains unchanged and linked to the 2000 Census.

The CDFI Fund also announced that policies governing the transition will be released along with the new eligibility tables. The New Markets Tax Credit Working Group recently submitted recommendations to the CDFI Fund regarding the transition to the new Census data. The NMTC Working Group recommended that a transition period be instituted for those transactions that have not closed but involve qualified businesses located in census tracts that were qualified according to previously available census data but subsequently are deemed located in an unqualified tract when the CDFI Fund publishes updated census data.

The NMTC Working Group specifically recommended that a CDE be able to use the previous period’s census tract data for any qualified low-income community investment (QLICI) that closes within 12 months from the release of new data or by December 31 of the year following the year in which the CDFI fund releases new census tract data, if the qualified business is specifically identified in an NMTC allocation application. The transition period would allow transactions to close using the data that was available before the release of the new data.

It will be interesting to see if the CDFI Fund accepts our recommended approach. Either way, the transition rules issued by the CDFI Fund will be important to those with existing allocations as well as those identifying projects to include in their NMTC allocation applications this year.

For questions about NMTC eligible census tracts, I encourage you to contact my partner Brad Elphick, CPA, at (678) 867-2333. More information about the New Markets Tax Credit Working Group is available at www.nmtcworkinggroup.com.

Click Here to Support Tax Credits

Wondering how you can support the important work being accomplished with the low-income housing tax credit, new markets tax credit, historic tax credit or renewable energy tax credit?

Below are some links you can use to contact your legislators and let them know why you support these important programs. Whenever possible, communicate to lawmakers the benefits these tax credits are providing in their states and home districts.

Low-Income Housing Tax Credit

Use the Tiberi-Neal “Dear Colleague Letter” to talk with your Congressional Representative about cosponsoring H.R. 3661. H.R. 3661 would make permanent the fixed floor rate for 9 percent low-income housing tax credits that was enacted as part of the Housing and Economic Recovery Act. Contact your Member of Congress – especially if he/she serves on the House Ways and Means Committee – and ask that he/she support and cosponsor the legislation. Visit the recently updated A.C.T.I.O.N. Advocacy Toolkit to read about H.R. 3661 and view tips on contacting your Members of Congress.

New Markets Tax Credit

Join the group of more than 1,000 businesses and organizations that support the NMTC extension. Several bills have been introduced to extend the new markets tax credit, including  H.R. 3224 to extend the New Markets Tax Credit program through 2016 at a level of $10 billion each year, and H.R. 2655, the New Markets Tax Credit Extension Act of 2011, which would extend the program through 2016, at a level of $5 billion in authority each year. Go to the New Markets Tax Credit Coalition’s web site to view sign-on letters in support of an extension of the NMTC and learn how to add your name to the current sign-on letter.

Historic Tax Credit

Ask your senator to support the CAPP Act to keep historic preservation working. Join the effort to protect the credit by urging Congressional support for the “Creating American Prosperity through Preservation Act.” Senators Ben Cardin and Olympia Snowe introduced S. 2074, the Creating Prosperity through Preservation (CAPP) Act of 2012 to improve and modernize the historic tax credit. The National Trust for Historic Preservation has compiled fact sheets and information to help the preservation community support the historic tax credit.

Renewable Energy Tax Credits

Urge Congress to extend the renewable energy production tax credit. Bipartisan support is growing for measures such H.R. 3307, the American Renewable Energy Production Tax Credit Extension Act, which would extend the production tax credit through 2016. Uncertainty over the future of the production tax credit is becoming hesitance to plan future wind projects. To preserve tens of thousands of jobs, the renewable energy industry, through groups such as the American Wind Energy Association, is urging Congress to take action to extend the PTC immediately.

Highlights of President’s Tax Reform Framework

Here are some highlights from the the President’s just released tax reform framework:

• Reduce the corporate tax rate from 35 percent to 28 percent
• Eliminate dozens of business tax loopholes and tax expenditures
  • LIFO Accounting
  • Oil & Gas Preferences
  • Insurance Industry Products
  • Tax Carried Interests Income as Ordinary Income
  • Special Depreciation for Corporate Aircraft
• Reform Corporate Tax Base
  • Address Accelerated Depreciation
  • Reduce Bias to Debt Financing
    • Include reducing deductibility of interest
  • Establish Greater Income Tax Parity Between Large C Corps & Large Pass-Throughs
• Reduce Gap Between Book and Tax Income

For Manufacturing:

• Reduce top rate to 25%
• Expand, simplify and make permanent the R&E Tax Credit.
• Extend, consolidate, and enhance key tax incentives to encourage investment in clean energy

Framework also has International Provisions and Small Business Provisions.

For Small Businesses:

• Expense up to $1 million in investments
• Expand cash accounting ($10 million gross receipts cap)
• Double deduction for start-up expenses ($5,000 to $10,000)
• Reform/Expand Health Insurance Tax Credit

No specific mention of low-income housing, new markets or historic tax credits.  Renewable energy addressed in section on extending, consolidating and enhancing clean energy incentives.

Highlights of Tax Proposals in the Proposed Fiscal Year 2013 Budget

In his proposed budget for fiscal year 2013, President Barack Obama includes several tax provisions of interest to the affordable housing, community development and renewable energy communities.

• Extend 100 Percent First-Year Depreciation Deduction. Applies to property acquired and placed in service through 2012 (2013 for property eligible for a one-year extension of the placed-in-service date).
• Provide Additional Tax Credits for Qualifying Advanced Energy Manufacturing Projects. Authorizes an additional $5 billion of credits, over two years.
• Provide Tax Credit for Energy-Efficient Commercial Building Property Expenditures.  Tax credit rate of $0.60 to $1.80 a square foot.
• Reform and Extend Build America Bonds.  Subsidy level of 30% through 2013 and 28% thereafter.  Use of bonds expanded also.
• Provide a New Manufacturing Communities Tax Credit.  For investment in communities that have suffered a major job loss event.  Could be structured like NMTC.  Provides $2 billion in credits a year for 3 years, 2012 to 2014. 
• Extend and Modify Certain Energy Incentives.  Extends production and investment tax credit for wind facilities for property placed in service in 2013.  Extends cash grant program for property placed in service in 2012 (including property where construction begins in 2012).  Makes credit refundable for property where construction begins in 2009 to 2013.  
• Extend and Modify the New Markets Tax Credit (NMTC).  $5 billion a year for two years, allows NMTC from QEIs made after 12/31/ 2011 to offset the AMT. 
• Low-Income Housing Tax Credit Provisions:

1. Allow LIHTC Properties to Use Average Income Restrictions.
2. Allow Real Estate Investment Trusts (REITS) to benefit from the LIHTC. Allows REITs to use LIHTCs to treat otherwise taxable dividend as tax-exempt.
3.  Provide 30%  Basis “Boost” to Certain Tax-Exempt Bond Financed Properties. For projects in difficult to develop areas, basis could be increased to 169% (130% * 130%).  To be eligible, property must receive “Federal-Investment-Protection Designation” from housing credit agency.  Designation could be given only to projects that satisfy the following requirements:
   1. The project involves the preservation, recapitalization, and rehabilitation of existing housing;
   2. The project demonstrates a serious backlog of capital needs or deferred maintenance;
   3. The project involves housing that was previously financed with Federal funds or benefited from LIHTC; and
   4. Because of that Federal support, the housing was subject to a long-term use agreement limiting occupancy to low-income households.  
4. Require LIHTC-Supported Housing to Provide Appropriate Protections to Victims of Domestic Violence.

 

Some Highlights From Obama’s FY2013 Budget

Select Tax Highlights from the President’s Budget:

• Extension of the payroll tax cut and unemployment insurance benefits for rest of 2012.
• Continuing to allow businesses to write-off the full amount of new investments.
• Project Rebuild, series of policies to help connect Americans looking for work in distressed communities with the work needed to re-purpose residential and commercial properties, creating jobs and stabilizing neighborhoods.
• $2.2 billion for advanced manufacturing R&D, a 19 percent increase over 2012.
• Tax incentives for manufacturers who create jobs in U.S.,doubles deduction for advanced manufacturing; establishes a Manufacturing Communities Tax Credit to encourage investment in communities affected by job loss.
• Elimination of 12 tax breaks to oil, gas, and coal companies will raise $41 billion over 10 years.
• National Infrastructure Bank to fund projects of national importance.
• Calls for individual tax reform that: cuts the deficit by $1.5 trillion, including the expiration of the high-income 2001 and 2003 tax cuts; simplifies the tax code, lowers tax rates, and protects progressivity; eliminates inefficient and unfair tax breaks for millionaires while making all tax breaks at least as good for the middle class as for the wealthy; and observes the Buffett Rule that no household making more than $1 million a year pays less than 30 percent of their income in taxes.
• Financial Crisis Responsibility Fee on largest financial institutions. Raises $61 billion over 10 years and is intended to offset cost of TARP and the President’s mortgage refinancing program.