How Do We Grow The Pie?
The affordable housing industry ended 2015 with some important victories on both the tax and spending fronts. After years of lobbying, we were able to secure the permanent 9% fixed credit rate. (THANK YOU Congressman Pat Tiberi for being the lead House sponsor of the bill on this for the last several years.) And on the appropriations front, the two year bipartisan budget deal spared the HOME program and other domestic discretionary programs the deep cuts that would have occurred if the budget control caps had gone into effect. Also, the National Housing Trust Fund and the less discussed but very important Capital Magnet Fund operated by the CDFI Fund in Treasury are moving ahead, and allocations and awards are expected this year. Finally! Not a bad way to finish 2015.
Not to be too much of a “glass half empty” guy, but nothing (with the exception of the Trust Fund and Capital Magnet Fund) can be described as a game changer that brings significant new resources to the table. It is all about defending long underfunded programs, and in the case of the 9% fixed rate, it brings certainty to transactions and allows more tax credits to go to individual deals without increasing the total tax credits available to states to address growing housing needs.
So the question is, after the positive but relatively modest achievements in 2015, what is the best way to advocate for policy changes that not only defend the current programs but have a chance at “growing the pie” in a meaningful way?
In terms of the LIHTC program, a consensus has emerged in the tax credit community to advocate for a 50% increase in the per capita credit amount that states receive. This is a key recommendation of the Bipartisan Policy Center’s Housing Commission Report issued two years ago. THAT would be a game changer! The appetite among investors and the capacity on the part of developers is certainly there to absorb the additional credits.
Of course given the political and fiscal realities that currently exist, this is a tall order. But we must push for growth in this highly successful program that already enjoys bipartisan support (though the width and breadth of that support can certainly be questioned.)
Two weeks ago today President OBAMA released his FY 2017 budget. As in the past, and given the ongoing gridlock in Washington, it is highly unlikely that much of the proposal, let alone the proposed line item amounts, will be passed. Indeed, Congress has not passed all of the appropriation bills that fund government before the end of the fiscal year for many, many years. The world of continuing resolutions and negotiated omnibus spending bills is the new norm. Presidential budget proposals by administrations can be described as “aspirational” at best.
But for the third year, President Obama’s budget has contained an important tax proposal that could be a huge boost for the LIHTC program. That proposal gives states the option of converting up to 18% of their private activity bond volume cap to 9% credit.
Here is how it would work. Each state has an annual limit on how much private activity tax-exempt bonds it can issue annually to support projects which are not governmentally owned. But in recent years almost all states have not come close to utilizing their full cap so there is tremendous excess bond cap that is not being used. This is a wasted resource that the federal government provides to states. Under the President’s proposal, states would be permitted to utilize this resource by converting up to 18% of their bond volume cap to LIHTC allocation authority based on a formula that is tied to the 30% credit rate, which is approximately 3.2%.Specifically, for each $1,000 of private activity bond volume cap surrendered, new 9% tax credit allocation authority would be created under a formula that takes the product of $1,000 times double the 30% credit rate for the prior December. Using Ohio as an example, with roughly $1.159 billion in private activity bond cap for 2015, the state could convert as much as $208 million of bond authority (18% of $1.159 billion). Under the formula it would then multiply that by twice the 30% credit amount (two times 3.2%), or 6.38% at the current rate. This would yield an additional $13.3 million of tax credits for Ohio which has an allocation cap of $26.6 million for FY 2015. This works out to a maximum 50% increase in credit authority for states that would utilize the provision.
Now THAT would be growing the pie! It gives states increased flexibility by permitting them to take a resource they are not fully utilizing – private activity bonds – and exchange for a housing tax credit program that is oversubscribed.
This approach to increasing tax credits is appealing for a variety of reasons, the top two being:
- Gives states the flexibility to decide on whether or not, or how much, bond authority is to be converted. Not a federal mandate.
- Trades one federal subsidy, bond volume cap, for another, 9% tax credits. Not a straight cap increase without a way to pay for a portion, let alone the whole thing.
Certainly there will be a substantial cost to the bond conversion strategy. The cost of exchanging unused bond volume cap for tax credits that will be used will figure into OMB’s calculations on the impact on federal revenues.
So there is no easy course. But as we advocate for a 50% increase in housing tax credits, it is critical that we keep this alternative in mind. I understand that our very own Senator Brown has been taking a serious look at this proposal and may introduce legislation in the near future.
In closing, I also wanted to thank folks that contacted me after the last email blast regarding my “A Little Soul Searching” article. (Click Here to Read)
I also want to thank the development partners OCCH worked with on Ohio 9% applications due last week on February 18th. Best of luck in the competition and hope you have recovered from that grinding ordeal!!!