Federal Tax Update: Tax Reform Framework Proposes to Retain the Low-Income Housing Tax Credit

Today the Trump Administration, House Ways and Means Committee and Senate Finance Committee leadership issued a "Unified Framework for Fixing Our Broken Tax Code" that seeks to lower tax rates, simplify the tax code, bring business back into the US, broaden the tax base and encourage economic growth.

The framework proposes to lower the top corporate tax rate to 20 percent, consistent with the House’s tax reform blueprint released in 2016, and eliminate “numerous” corporate tax expenditures in order to help achieve the lower rate.

The Low-Income Housing Tax Credit is one of only two corporate tax expenditures that the framework explicitly preserves, noting that it is a tax incentive that has “proven to be effective in promoting policy goals important in the American economy.” Its inclusion in the plan is a testament to the proven track record of the program, the need for resources to address our nation’s vast and growing shortage of affordable housing, and the strong bipartisan support that the ACTION Campaign and its members have built over many years. The framework also notes that tax rules affecting specific industries will be modernized “to ensure that the tax code better reflects economic reality,” providing an opportunity to strengthen the Housing Credit.

The only other tax expenditure the framework proposes to retain is the Research and Development Credit, which was the sole corporate tax expenditure explicitly retained in the House’s tax reform blueprint. The framework is silent on the tax exemption for private activity bonds, which provide critical financing to more than 40 percent of Housing Credit developments in the form of multifamily Housing Bonds. However, it does indicate that “while the framework envisions repeal of other business credits, the committees may decide to retain some other business credits to the extent budgetary limitations allow.”

Other key features of the plan include:

· Corporate tax reforms

  • Reducing the top tax rate for certain pass-through and small businesses to 25 percent
  • Allowing immediate expensing of new investments for at least five years
  • Partially limiting interest deductibility

· International tax reforms

  • Moving from a worldwide to a territorial system to allow companies to repatriate profits without incurring additional taxes
  • Subjecting all overseas profits to a one-time tax
  • Establishing base erosion rules

· Individual tax reforms

  • Proposing unspecific reforms to the Earned Income Tax Credit
  • Increasing the Child Tax Credit
  • Doubling the standard deduction and eliminating most itemized deductions
  • Compressing the current seven individual tax brackets into seven
  • Repealing the Estate Tax
  • Eliminating the individual Alternative Minimum Tax

The tax reform framework will now be sent to the tax committees in Congress, where the expectation is that details will be worked out through regular order with the ambitious goal of having tax reform signed into law by the end of the year. Tax reform is still anticipated to advance under the budget reconciliation process, meaning it only needs a majority vote in the Senate instead of the typical 60 votes, but also requires near unanimity among the Republican caucus. However, in order to move the bill using reconciliation, Congress must first pass a Budget Resolution providing reconciliation instructions for the tax reform bill. As the health care reform efforts demonstrated, reaching even a simple majority in the Senate can be difficult.

While the framework released today is helpful in understanding the priorities of Congressional leadership and the White House, this initial proposal may be changed significantly as the committees work out details. It is unclear, for example, whether Congress will seek to achieve deficit neutral tax reform, as envisioned in the Budget Resolution passed by the House Budget Committee, or allow for tax reform to add to the deficit, as is currently under consideration by the Senate Budget Committee. While the Senate Budget Committee has not yet passed a Budget resolution, it is reportedly going to allow for tax reform to cost up to $1.5 trillion over ten years. The tax rate cuts envisioned in the unified framework will likely total more than $1.5 trillion, making offsets necessary regardless of how Congress proceeds with a Budget Resolution.

The coming weeks and months as these details are negotiated will be critical for the Housing Credit and Housing Bonds. Throughout this process the ACTION Campaign will:

· Thank congressional and administration leadership for recognizing the value of the Low-Income Housing Tax Credit,

· Advocate to ensure that the Housing Credit is not only retained in tax reform, but also strengthened and expanded,

· Urge that Congress include the Affordable Housing Credit Improvement Act as part of tax reform, and make additional modifications to offset the impact of a lower corporate rate on Housing Credit investment and subsequent production, and

· Ensure that the tax exemption on multifamily Housing Bonds is retained.

The ACTION Campaign will soon be circulating an ACTION sign-on letter to reinforce these messages to Congress and the Administration.

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