Defending the Forts

11 min read

Coalitions stand up for tax credits

“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”
– former Secretary of Defense Donald Rumsfeld, February 12, 2002

The Current Situation
Though it hearkens back to a different time, a different leader and a different struggle, the former defense secretary’s comment during a Pentagon news briefing pretty much portrays the current industry knowledge of the Trump Administration’s intentions and goals regarding affordable housing, urban regeneration, historic rehabilitation and the tax credit and other government programs that support them. The proposed budget and tax reform represent two distinct but interrelated challenges.

“I don’t know,” states William “Bill” MacRostie, director of MacRostie Historic Advisors, a consulting firm with deep expertise in Historic Tax Credits and regulatory issues. Prior to that, he was national director of historic property services for Ernst & Young. “There are all kinds of signals coming from the White House, and this is not unique to our field. You don’t know what the administration is thinking.

The administration doesn’t know what it is thinking. There are so many crosscurrents at work that it is hard to define a policy direction.”

“There are a number of contradictory statements we can look at,” says John Leith-Tetrault, founder and public policy advisor to the National Trust Community Investment Corporation (NTCIC). “We’re sort of in a wait-and-see attitude. There are the tax reform and tax expenditure issues before us. On the other hand, the president and his team have not weighed in officially on tax reform. We don’t know what the markers are going to be.”

Robert A. “Bob” Rapoza, president and principal of Rapoza Associates, has more than four decades’ experience as a professional lobbyist with a focus on revitalizing small rural communities and big city neighborhoods. His clients include the New Markets Tax Credit Coalition. “It’s all very vague and a moving target,” he says. “On the spending side, a good deal of it is quite concerning and troubling, such as rural water and sewer loans, housing and the CDFI Fund [Treasury’s Community Development Financial Institutions Fund]. It is not the rhetoric we heard during the campaign. My sense is that a good deal of that will not fly.”

Diane Yentel, president and CEO of the National Low Income Housing Coalition (NLIHC) in Washington, DC, says, “There are a lot of unknowns – more than usual. There are some really significant threats and some pretty significant opportunities. We knew this would be a tough budget because of the caps and defense spending. And there is no doubt the level of cuts being considered would be devastating to people who need help. Fortunately, that is receiving a cool reception on Capitol Hill.”

“As far as Congress’s vision of tax reform, there is virtually no doubt the House version will not contain urban revitalization carve-outs, and this includes Historic, New Markets and Energy. LIHTC will be there in some form,” MacRostie believes.

If consensus wisdom is any guide, during the ongoing budget wrangling for the next several fiscal years, the White House is likely to remain a moving target, the House will be problematic and divisive between Democrats and Republicans and between Republicans and Republicans, and the Senate will be somewhat more bipartisan and “reasonable.”

“The Senate has more of a tradition of bipartisan cooperation,” says Leith-Tetrault. “But it certainly wasn’t there on healthcare, so we’ll have to wait and see.”

House speaker Paul Ryan conceded that the White House, Senate and House “aren’t on the same page on taxes.”

Having acknowledged that, however, a number of industry watchers noted that there has been longstanding support across the aisle for a number of housing and rehabilitation programs, especially Low Income Housing Tax Credits.

As a result, Emily Cadik, director of public policy for Enterprise Community Partners in Washington DC, which strives to create greater affordable housing opportunities, is “cautiously optimistic that committee staffs will be open to making the changes that will be needed to offset changes in the corporate tax rate or other corporate reforms that could impact tax credits. We and others have been working with the staff on tax writing. There is bipartisan support for all three building tax credits – Low Income, Historic and New Markets – with the strongest maybe for LIHTC, but none would be easy to eliminate from the tax code.”

Cadik notes that legislation is pending to strengthen LIHTC and to expand New Markets Tax Credits and make the program permanent, though she concedes that, “If these programs are standing in the way of lowering the tax rate, support may not be as strong. We are taking nothing for granted.”

“The picture is muddled,” Rapoza agrees. “No one really knows what it is going to look like for New Markets credits.”

“The thing that has intrigued me trying to read the tea leaves is how the president’s take on the infrastructure bill will be packaged,” MacRostie observes. “Tax credits may be utilized and may provide an opening. But the House bill I don’t think will take that sort of approach.”

And Yentel warns, “It is very clear that a one-time boost in infrastructure spending will not make up for annual programs. My concern is that the initial budget proposals will move the goal post so far that half of what we had before will be considered a reasonable compromise.”

“There may not be support at Treasury for the border-adjusted tax,” says Leith-Tetrault, “which would blow a trillion-dollar hole in the budget. That would put more pressure on expenditures, which would not bode well for community development tax credits.”

“What will they do without border adjustment revenue?” MacRostie concurs. “There will have to be more pressure on finding other revenue sources; this is not a good time. One thing we can say is that there will be a ferocious lobbying effort, and it would appear that the Senate is where the horse trading might get done. And then we would hope for effective committee reconciliation between the two chambers.”

Yentel says, “It’s still unknown on tax reform whether reconciliation will work.”

Industry Strategies
So that is the current state of affairs as lucidly as anyone can now interpret them. The key question becomes:

What can be done to save tax credits and other supportive programs, such as HOME (HUD’s Home Investment Partnership program)?

While Bob Rapoza advises that, “It is always wise to be concerned when a president wants to kill budget items, he should like tax credits because they accomplish what he says he wants to accomplish. In other words, this should look good to him: getting profit-seeking private money into action.”

“Private investment in a nonprofit project ought to be just as important as a traditional for-profit commercial development,” Leith-Tetrault states. “The economic effects are the same.”

There are a number of different strategies being undertaken, but all of the individuals Tax Credit Advisor contacted stressed the need for one-on-one, office door-by-office door lobbying and outreach – what MacRostie characterizes as “a classic Capitol Hill advocacy and education effort, describing how these programs affect members’ districts. With the prospect of tax reform, Republican senators have been reluctant to get out in front on the kind of special interests we deal with, so we’re looking for fast-moving opportunities as they arise.”

“We’re talking to people on the Hill from both sides,” Rapoza says. “And there is a lot of support for programs like the CDFI [Community Development Financial Institutions] Fund and rural water and sewer improvement. We’ve produced a book with 35 case studies of what is working locally, so we can say, ‘Here’s a family in our state or district that has a decent home and living situation because of these programs.’”

MacRostie adds, “Clearly, there are examples of these projects in every main street and downtown around the country, yet you wouldn’t know it unless it was pointed out to you.”

Cadik’s group has taken the tactic a step further, with “a focus on bringing members of Congress out to see projects and examples in their home areas. We consider this long-term advocacy and we’ve been doing it this way for years. I think it is very likely there will be cuts in funding the HUD budget. What they are, and for how much, will depend on advocacy.”

She thinks both parties view the opening round proposal of cuts as too severe and therefore believes “the administration as the biggest challenge. They don’t have a full tax staff yet, but they seem to be aware of LIHTC and New Markets. LIHTC may be impacted, but there is a good chance of moving forward because of bipartisan support. The Cantwell-Hatch Bill [Senator Maria Cantwell (D-WA) and Senator Oren Hatch (R-UT)] wants to expand LIHTC by 50 percent, and there are 24 other changes to strengthen the program.”

As to where HUD itself stands, Cadik says, “My understanding is that Secretary Ben Carson is planning to do a listening tour inside and outside of HUD, to find out what’s working and what’s not. I’m eager to see what sort of role HUD will be playing in fighting for these housing programs.”

Various advocacy groups are applying a full-court press in what Cadik calls “this higher-stakes environment.”

These include NLIHC and its Campaign for Housing and Community Development Funding. One of its aims is sequestration relief – to lift the spending cap so that affordable housing programs can receive greater funding.

The Historic Tax Credit Coalition, which Leith-Tetrault chairs and with more than 70 member organizations, advocated for the Tax Credit Improvement Act, which currently has 42 sponsors in the House and ten in the Senate. The act would raise the Historic Tax Credit percentages and permit credits to be sold outside of partnerships in the form of tax certificates. Of the 34 states with state credits, at least half already allow this.

On February 7, some 2,000 groups, including Community Development Entities (CDEs), investors, businesses and nonprofit organizations that have seen the New Markets Tax Credit at work in their communities sent a letter to Congress calling on it to enact legislation that provides a permanent authorization and expansion of the program.

In addition, local officials and neighborhood stakeholders are sending the message and information upward to state and national politicians. In March, during a Washington, DC symposium jointly sponsored by the National Conference of State Preservation Officers and Preservation Action, featuring congressmen from both parties as speakers, there were sessions on “How to do a Hill Visit” and “How to Use Facebook for Effective Advocacy.”

Fundamental to the strategic plans is an acknowledgement that there is inherent disagreement on Capitol Hill and within the White House over the proper role of government in housing, urban rehabilitation and rural infrastructure.

“For example, there is an internecine struggle among House Republicans over the orthodoxy that the government should not be ‘picking winners and losers’; that lower tax levels and a broader base will improve conditions, and there is some wisdom in that,” says MacRostie. “But the pure market does not take care of high-risk endeavors.”

“This is a very thin credit, so it’s a lot easier to pay for itself and a lot of developments wouldn’t happen without it,” Leith-Tetrault says, speaking of Historic Tax Credits. “And the credit returns more to the Treasury than it costs. According to surveys, these projects perform much better on average over a ten-year period than typical real estate developments, with a foreclosure rate of only 0.77 percent. Opponents say that with lower tax rates, developers will do more. Just the opposite is true. They won’t do projects that are not feasible and can’t be fully funded. Many of these are in the toughest neighborhoods where commercial companies will not take on anything, so there is even more impact to these support programs.”

As MacRostie puts it, “You can argue whether the tax code is the proper place to encourage affordable housing, urban renewal and historic preservation, but it’s certainly been very effective in bringing private capital into targeted areas.”

And as Yentel summarizes, “We don’t lack the data. We don’t lack the solutions. We don’t lack the resources. We do lack the political will, so we have to raise these issues on our politicians’ list of priorities.”