On February 26, 2014, Ways and Means Committee Chairman Camp issued a discussion draft of his comprehensive restructuring of the Internal Revenue Code of 1986 (as amended, the “Code”). The revisions reduce corporate and individual income tax rates and repeal, reduce or modify many corporate and individual tax benefits. Among the tax benefits that are repealed are the historic rehabilitation tax credit and both the renewable energy production and investment tax credits. The expired new markets tax credit was not revived, so it would effectively remain repealed.
The low-income housing tax credit (“LIHTC”) is one of the rare tax credits that would be retained in the Code under Camp’s plan. LIHTC is substantially modified in ways that would simplify its application but reduce the cost of the program. Reduction in cost generally translates into a reduced number of transactions and a reduced level of subsidy for those transactions that are funded under the LIHTC program.
- Camp’s discussion draft would repeal private activity bonds and as a result, the 4% LIHTC would also be repealed, including 4% credits attributable to acquisition. Accordingly, bond financed projects would disappear.
- The 9% LIHTC rate would float and the credit period would be extended to 15 years. By extending the credit period, recapture of LIHTC would be repealed. Noncompliance would trigger disallowance of current and future LIHTC.
- The 70% present value calculation would be retained, but the 15 year credit period would reduce the annual credit percentage. While the total amount of credit allocated to a project would be increased, the value of the increased amount of LIHTC would be less than the present value of the reduced LIHTC available in years 1 through 11. As a result, credit pricing would likely be reduced. Reductions in effective tax rates would reduce the value of losses and further reduce credit pricing. The proposed increase in depreciable life for residential property would reduce the amount of loss available to investors and also reduce pricing. The consequence of the reduced equity will require a higher percentage of debt financing to fund project costs and force allocating agencies to increase the anticipated rents charged to LIHTC tenants. As a result, the number of units available to the lowest income LIHTC tenants will be reduced.
- The 130% basis boost for qualified census tracts and difficult to develop areas would be repealed. The elimination of the basis boost will decrease the equity available for projects and also make it more difficult to serve very low income populations.
- The national pool mechanism to reallocate unallocated credit would be eliminated. As a result, LIHTCs that remain unallocated by a state for 2 years would be lost.
- Under the Camp discussion draft, State allocating agencies would allocate “qualified basis” instead of credits, based upon $31.20 multiplied by the population of the state, with a minimum of $36,300,000 of qualified basis available for allocation by each state. Qualified basis would be reduced by federal grants.
- The general public use requirement would be modified to include a veteran’s provision and retain the current special needs exception while eliminating the artistic and literary exception.
- These changes would be effective for calendar years after 2014, with certain transition rules.
These proposals are only a “discussion draft” and not a bill or even a chairman’s mark to be used in a Ways and Means Committee legislative session. Commentators, including both Republican and Democrat Senators, have stated that they believe comprehensive tax reform will not happen in 2014. While we share the view that major tax reform is extremely unlikely in 2014, Chairman Camp’s “discussion draft” will likely be one of the starting points for future tax reform efforts in subsequent legislative sessions and many of its provisions may be included in future tax reform proposals. The tax credit community should continue to make their views of the importance of these credit programs very clear to all of the participants in the tax reform process.