Most Planning, Development Tools Survive in Tax Reform Compromise

House and Senate negotiators struck a compromise agreement late last week paving the way for final votes this week on tax reform. With a vote in the House expected on Tuesday, and the Senate following suit later in the week, Hill Republicans are poised to meet their goal of getting tax legislation to President Trump by Christmas.

Thanks in large part to the work of planning and community development advocates, most of the imperiled infrastructure, economic development, and housing tools survived in the final legislation. While this is an important achievement, the overall changes in the legislation pose new uncertainties for local communities.

Overview of Key Provisions

Private Activity Bonds – Retained

PABs had been eliminated in the House bill, but conferees opted for the Senate-passed approach and kept these critical housing and infrastructure investment tools.

New Markets Tax Credit – Retained

As with PABs, the House had proposed the elimination of New Markets Tax Credits. However, the final bill maintains NMTC for 2018 and 2019 with annual $3.5 billion allocations.

Historic Tax Credit – Modified

The compromise bill adopts the Senate's approach to the Historic Tax Credit. The legislation maintains the HTC but, in a change from current law, requires investors to claim the credit over five years.

The bill eliminates the 10 percent credit for pre-1936 non-historic rehabilitation. Transition measures were included with expenses for the rehabilitation of non-historic buildings owned as of January 1, 2018, qualifying for the credit if their rehabilitation begins within 180 days of enactment.

LOW-INCOME Housing Tax Credit – Retained

LIHTC was maintained in the legislation in its current form. The conference committee rejected proposals to eliminate the existing exemption for artist housing, as well as new provisions for rural housing. The preservation of PABs was also an essential element in maintaining the effectiveness of LIHTC.

Advance Refunding of Municipal Bonds – Eliminated

The final legislation eliminates the advance refunding of municipal bonds. The move was not a surprise given that both the earlier House and Senate bills had also eliminated the refinancing tool. Still, the change is likely to increase costs to local governments and taxpayers. A late effort to urge lawmakers to phase in the transition with a later effective date was rejected.

New Caps for SALT, Mortgage Interest

The tax legislation also makes changes to both the mortgage interest deduction and the deduction for state and local taxes. Both moves could have impacts on housing and local government finance.

The cap on mortgage interest deductions for first and second homes will be reduced from $1 million to $750,000. The deduction for state and local taxes is capped at $10,000 and can include property, sales, or income taxes. Changes to the standard deduction and corporate rates could also reduce incentives for individuals to itemize or businesses to seek certain credits. The bill also eliminates the tax incentive for private employers that subsidize employee transit, parking, and bicycle commuting expenses.

Looking Ahead

Beyond the bill's specific changes, the tax overhaul's long-term revenue impact could also have a broader effect on federal, state, and local budgets and fiscal policy.

Another area of uncertainty is infrastructure. The Trump administration is targeting January for the release of a more detailed infrastructure plan, and it is an open question how any new spending in that proposal will be funded.

Top image: East side of U.S. Capitol. Wikimedia Commons photo.