House Tax Writers to Consider Historic Legislation to Expand Housing Credit, Lower Bond-Financing Threshold, Enact Neighborhood Homes Credit

The House Ways and Means Committee over the weekend released the text of the infrastructure financing and community development sections of the reconciliation legislation it will mark up tomorrow and Wednesday, including major investments in the Low Income Housing Tax Credit (Housing Credit), lowering the bond-financing threshold for 4 percent Housing Credit developments, and establishing a Neighborhood Homes Investment Credit program — all major NCSHA priorities. The bill as currently drafted would provide the largest increase in Housing Credit resources since the program’s enactment in 1986. NCSHA urges all affordable housing stakeholders to reach out to their delegation members on the Ways and Means Committee to express support for the bill.

Major housing provisions in the bill include the following.

Housing Credit

• A temporary 60 percent cap increase phased in at 15 percent per year over four years (calendar years 2022 to 2025). In years 2026 to 2028, Housing Credit authority would be the amount authorized for 2025 adjusted for inflation. The 12.5 percent increase achieved in 2018 and applicable to calendar years 2018 – 2021 is included in the baseline from which the 60 percent cap increase is set. The cap increase would be subject to a 10 percent set-aside for properties that reserve at least 20 percent of units for extremely low-income (ELI) households with corresponding rent restrictions. The cap increase would sunset after 2028, with Housing Credit authority returning to what it would have otherwise been without the cap increase.
• The bill lowers the bond financing test from 50 percent to 25 percent for 4 percent properties financed with an obligation of bond authority issued in the seven years from 2022 to 2028.
• Properties that reserve at least 20 percent of units for ELI households with corresponding rent restrictions would be eligible to receive up to a 50 percent basis boost for the basis associated with the ELI units. States could use no more than 15 percent of their credit authority for properties receiving the ELI basis boost. The 50 percent ELI basis boost also would be available for bond-financed Housing Credit properties, but states would only be able to devote up to 10 percent of their private activity bond (PAB) authority to such properties. The ELI basis boost would be available through December 31, 2031.
• State Housing Credit agencies would be able to provide a discretionary basis boost of up to 30 percent to bond-financed properties until December 31, 2028.
• Properties in rural and native American areas also would be eligible for an up to 30 percent basis boost if needed for financial feasibility. These basis boosts would be permanent in the tax code.
• The bill includes a permanent repeal of the qualified contract option for newly-financed properties and modification of the statutory formula for determining the qualified contract price for an existing property to base the price on the fair market value of the property as affordable housing. According to NCSHA data, more than 93,000 affordable homes have been lost prematurely from the Housing Credit inventory because of qualified contracts.
• The bill replaces the nonprofit Right of First Refusal (ROFR) with a purchase option for newly financed properties. It also clarifies for existing properties that the ROFR applies to all partnership interests, including assets relating to the building such as reserve funds, and that the nonprofit may exercise its ROFR with or without the approval of the limited partner and in response to any offer, including an offer by a related party. These changes would be a permanent part of the tax code.

Neighborhood Homes Credit

• The bill establishes the Neighborhood Homes Credit (NHC) to promote new construction or substantial rehabilitation of affordable, owner‐occupied housing located in distressed neighborhoods. The NHC would allow project sponsors to claim a credit to cover the difference between the costs to rehabilitate a home in a distressed neighborhood, or build a new home on an empty lot, and the price for which the home is sold. As with the Housing Credit, the program would be overseen by the Treasury Department and Internal Revenue Service, which would allocate credit authority to each state. Each state would be required to designate a single agency to award the credits, and each agency would be expected to develop a Qualified Allocation Plan for their NHC program. Each state’s NHC allocation would be equal to its state population times $6, with a small-state minimum of $8 million.

Other Provisions of Note

• The bill would eliminate the depreciable basis adjustment for Housing Credit-financed properties that are also eligible for the Historic Credit, effective for properties placed in service after December 31, 2022.
• Water and sewage facilities would be exempt from the PAB volume cap, but zero-emission vehicle infrastructure would become another eligible activity under the PAB volume cap.
• Tribal governments would be eligible to issue PABs. Ways and Means staff have told NCSHA this would not impact state PAB volume cap amounts.

To offset the cost of the legislation, the bill would increase the corporate tax rate to 26.5 percent from the current level of 21 percent, boost the top rate for individual tax filers to 39.6 percent, increase the top capital gains rate to 28.8 percent, limit deductions for interest expenses, modify the deduction for foreign-derived intangible income and global intangible low-taxed income, and make various other changes to the tax system to raise revenue.

Once reported by the committee, the legislation will be combined with the reconciliation bills reported by other House committees, including the House Financial Services Committee which marks up its legislation today, before going to the Rules Committee and final consideration on the House floor. There will be intense pressure to reduce the overall size and scope of the reconciliation bill when it gets to the House floor, and even more pressure when action turns to the Senate side, where moderates, including Senator Joe Manchin, have objected to a reconciliation bill totaling $3.5 trillion and suggested a far more modest spending number. There will also be major opposition from business groups and others seeking to eliminate or modify the corporate tax rate increase and other revenue-raising provisions. Therefore, it is incumbent on housing stakeholders to keep up the pressure on members of Congress to make sure that critical housing provisions are not significantly reduced or cut from the bill.