For those of us who are heavily involved in the Low-Income Housing Tax Credit (LIHTC) Program, the future of tax reform is not just a casual interest. The survival of the Section 42 Program is by no means assured in this era of federal reallocation of resources.
Even if the LIHTC program survives (which I believe is more likely than not), there will be changes. So, in addition to constantly educating our Congressmen and Senators about the value of the program, it is also important that we pay attention to the status of the D.C. tax reform efforts.
Early this year, some members of Congress were predicting rapid progress on tax reform with passage by early summer (of course they also predicted rapid repeal of the Affordable Care Act). However, with each week, the estimates of when passage may occur keep getting later and later. Estimates moved from early to mid-summer, then late summer, and now – the end of the year is being discussed as a more realistic timeframe.
Tax reform is clearly facing headwinds, and there are a number of reasons why rapid action should not be expected.
- The President and Congress are not on the same page when it comes to goals. The Trump plan (as proposed on April 26) increases the deficit and wants to use tax reform to fund a massive infrastructure program. The House blueprint is revenue neutral.
- Lobbyists have an inordinate amount of power in the Beltway and they will marshal all their resources to protect their interests. The House plan reduces tax benefits for charitable donations – this will raise the ire of religious groups. Possible reductions in the mortgage interest deduction for homeownership will be strongly opposed by the powerful real estate lobby. The Trump plan leaves in the deductions for mortgage interest and charitable contributions. There are also proposals to eliminate deductions for state and local taxes, and lawmakers from high tax states, such as California, New Jersey, and New York, will oppose this.
- Part of the House plan is called the “Border Adjustment Tax.” This provision would tax imported goods at a higher rate than domestically manufactured products and is intended to raise $1 trillion to offset cuts to corporate tax rates. Such a provision will be strongly opposed by retailers and conservative advocacy groups, and is not supported by the Trump proposal. Any import tax will be passed onto consumers in the form of higher prices, but without this type of tax, cutting corporate tax rates by any significant amount will be more difficult.
- The Senate is also a problem. Less conservative than the House, many provisions desired by the House may not be acceptable to the Senate. Also, memories of the health care debacle are fresh in the mind of the House and they do not want to send a dead-on-arrival bill to the Senate.
- Finally, there will almost certainly be strong opposition from democrats. In addition to basic philosophical differences, the Dems are going to push for Trump to release his tax returns before agreeing to any reform. They will want to ensure that the reforms are not designed to enrich the President and his family. If the first four of these obstacles can be overcome, this last one may not be as important since the Senate may be able to pass tax reform through reconciliation, which will enable the Senate to pass legislation by a simple majority vote rather than requiring a filibuster proof 60 votes. However, use of reconciliation to pass tax-reform is a risky proposition because it would produce extreme and unstable tax policy. It also prevents tax legislation from being permanent if the tax reform increases deficits for more than ten years, which could result in having to revisit major tax code revisions in less than ten years.
With all that is going against it, the idea that rapid tax reform is in the cards is losing favor, and we well could be looking at 2018 before we see any meaningful movement toward reform. In the meantime, all in our industry need to be alert to challenges to the LIHTC program and work hard to ensure that the successes and value of the program is shared with elected officials.