The Tax Cuts and Jobs Act has been approved by the House and Senate, and it is on the way to President Trump for signature. Fortunately for affordable housing advocates, the worst case scenario that was presented in the House version of the bill has been averted. The House version proposed elimination of tax-exempt bonds and 4% tax credits, which are two of the primary financing mechanisms currently used to produce affordable housing. In addition, the House version proposed elimination of New Markets Tax Credits and Historic Tax Credits- two other tax credit programs that are used to develop affordable housing, revitalize neighborhoods, and achieve economic development goals for low-income communities. All of these programs have been preserved in the current version of the bill approved by the House today, and to be voted on in the Senate tonight.
For now, federal housing programs have been saved. In the long term, the Tax Cuts and Jobs Act diminishes the ability of those federal housing programs to produce affordable housing.
First, the tax reform bill weakens the value of the Low Income Housing Tax Credit. It does this by reducing corporate tax rates from 35 percent to 21 percent. Reduced tax liabilities weaken corporate incentive for tax credits. As a result, the amount of equity put into housing projects per tax credit dollar will diminish, raising fewer funds for housing and leading to fewer affordable units built. This trend began when the reduction in the corporate tax rate was anticipated, but prior to even drafting the bill. Tax credit investors that had already committed to a price on projects in development began to reduce the price of their offers. The devaluing of the credit will only accelerate after the bill becomes law.
Second, a potentially more significant and longer term impact of the tax reform bill is the downstream consequence of rising deficits and imbalanced budgets. The tax bill increases the federal deficit by at least $1 trillion over the next decade. The effect of this may be felt by federal housing programs as soon as next year, as The "Pay-As-You-Go Act of 2010" may be triggered by significantly reduced government revenues. This Act forces automatic cuts to discretionary spending programs that must be approved in annual federal budgets in order to limit increases to the federal debt. This act forced budget sequesters after it was enacted, cutting HUD programs by 10%-15% annually. These sequesters are likely to return if the Tax Cuts and Jobs Act remains in place.
Beyond sequesters, the large deficit increases are likely to create larger imbalanced budgets in future years, and House Majority Leader Paul Ryan's stated goal is to balance the budget by cutting entitlements and domestic spending, which would include the HUD budget. Such cuts would further reduce funding for HOME, CDBG, Section 8, homeless housing and services, and other federal housing and community development programs. Cuts to these programs will further diminish the capacity of tax credits to produce housing, as programs such as HOME and Section 8 leverage additional tax credit equity and private debt to produce more units.
Those that depend most on entitlements and domestic programs are lower income households. In effect, the tax reform represents a transfer of resources from the "have-nots" to the "haves". As a result, affordable housing and community development for low-income communities are likely to receive low priority in future budgets if the political environment does not change significantly.
This assessment, of course, assumes that the Act will not be amended, revised or repealed in the coming years. However, if recent history is any indication, there are likely to be shifts in congressional priorities over the next decade.