Funding for housing—including tax incentives to build housing for low-income households—has been reduced in the latest iteration of the Biden administration’s Build Back Better (BBB) infrastructure legislation, but also removed were provisions that would have raised taxes on commercial real estate owners.
Although final details of the legislative package are still being negotiated, President Biden announced this week that a framework of an agreement has been reached among Democrats. The legislation’s price tag was whittled down to $1.75 trillion from the original proposal of $3.5 trillion due to objections by Democratic Sens. Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ). BBB is intended to expand the social safety net and address issues that include climate change, housing and childcare.
The amount allocated to housing in the latest version is $150 billion, about half of the $300 billion proposed in the original proposal. Among the programs cut from the latest version are a $29 billion expansion of the low-income housing tax credit (LIHTC), which is used by developers to build affordable housing. The latest version also cut out tax credits for infrastructure, rehabilitating historic structures, and the sale of homes in low-income neighborhoods.
Some of the housing provisions that made the cut and are included in the latest version of BBB are:
- $65 billion for public housing improvements.
- $24 billion for housing choice vouchers.
- $20.5 billion to forgive National Flood Insurance program debt.
- $15 billion for new affordable rental homes.
- $10 billion to provide first-time, first-generation homebuyers with assistance.
- $10 billion for the HOME Investment Partnerships Program that funds affordable homes for low-income households.
Although the provisions remaining in the bill should produce some relief for the affordable housing crisis, cutting the expansion of LIHTC is a big blow. LIHTC is used by municipalities and developers to incentivize the badly needed construction of apartments that are affordable to low-income households.
Democrats had to reduce the size of the package because of demands from Manchin and Sinema. With no Republican votes in the Senate, Democrats could not afford a single “no” vote, and the “centrists” said they would not support a bill larger than $1.75 billion. Faced with the need to cut half of the spending proposals, the administration apparently decided to focus funds allocated for housing on helping low-income homebuyers and upgrades to public housing.
“My hunch is that the political leadership focused the $150 billion in housing towards the absolute poorest, most difficult housing issues,” said Justin Ailes, managing director of government relations at the CRE Finance Council, a Washington, D.C.-based trade group.
What’s more, not all supporters of the infrastructure bill are fans of the LIHTC program. The Washington, D.C.-based Tax Policy Center, a venture between the Urban Institute and Brookings Institution, noted that LIHTC’s critics argue the federal subsidy per unit of new construction is higher than it needs to be because of the various intermediaries involved in its financing—organizers, syndicators, general partners, managers and investors—each of whom are compensated for their efforts. As a result, a significant part of the federal tax subsidy does not go directly into the creation of new rental housing stock.
Critics also say that some state housing finance authorities tend to approve LIHTC projects in ways that concentrate low-income communities where they have historically been segregated and where economic opportunities may be limited. Finally, while the LIHTC may help construct new affordable housing, maintaining that affordability is challenging once the required compliance periods are over.
Tax Policy
The real estate and other industries were able to fight off most of the proposed increases in taxes that directly impacted the market. Out of the bill are proposed limitations on like-kind exchanges, increases in the capital gains rate, changes in the treatment of carried interest and restrictions on the 20% pass-through business income deduction.
The main tax increase in the bill to pay for the spending is a 15% corporate minimum tax on large corporations. The corporate minimum tax is part of an agreement reached with 150 nations across the world to reduce corporations’ use of tax havens to shield income from taxation.
Because negotiations are ongoing, the final version could change. “Negotiations are hour-by-hour, and we have seen provisions drop out and come back. Stay tuned,” said David McCarthy, CREFC’s managing director & head of policy. “This was a $6 trillion bill narrowed to $3.5 trillion and now down to $1.9ish trillion. It’s a battle on keeping what is most precious.”
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