Earlier this week, the Senate and House each passed the final version of the Tax Cuts and Jobs Act of 2017. Upon its enactment, this bill will have significant and long-lasting implications for the four major federal tax credit programs aimed at incentivizing private investment in socially beneficial projects: New Markets Tax Credits (NMTC), Low-Income Housing Tax Credits (LIHTC), Historic Tax Credits (HTC) and Renewable Energy Tax Credits (RETC). These tax credit programs have had a profound impact in Vermont and beyond by revitalizing communities and historic downtowns, spurring investment in economically depressed areas, improving the stock of safe, affordable housing and combating the growing threat of global warming.
The good news for supporters of the federal tax credits is that the tax bill does not eliminate any of these programs. Many were taken off guard when the House introduced its initial version of the bill, which proposed to eliminate the New Markets Tax Credit and the Historic Tax Credit programs effective in 2018 and the Renewable Energy Investment Tax Credit program effective in 2022. The House version also proposed eliminating private activity bonds and the so-called “4 percent” LIHTC program, which would have resulted in a substantial loss of low income housing. The House’s bill was particularly surprising as each of these programs had conservative roots, in that they focused on incentivizing private investment as opposed to relying on federal entitlements or similar programs. Fortunately, the draconian provisions of the House version of the bill have been removed from the final Tax Cuts and Jobs Act and each of the tax credit programs remain largely intact.
The Act will have significant implications for each of these tax credit programs, however, foremost of which is a substantive reduction in the value of and the demand for these tax credits. In lowering the corporate tax rate from 35 percent to 21 percent, the value of these tax credits to potential investors will decrease. In addition, because corporations will have a significantly lower aggregate tax liability under the new Act, the demand for tax credits to offset tax liability will also drop appreciably.
A second significant change caused by the Act is the creation of a new “Base Erosion and Anti-abuse Tax”, which is essentially a new alternative minimum tax on foreign-owned corporations or U.S. corporations with significant foreign operations. This new tax among other things prevents corporations subject to the tax from claiming NMTC or HTC, and limits such corporations from realizing the full value of LIHTC and RETC, among others. This will again have the effect of reducing the demand for and the value of these tax credits.
Aside from these changes, the final Tax Cuts and Jobs Act leaves the tax credit programs largely in place, however. The final tax bill retains both the 9-percent and the 4-percent LIHTC, as well as the private activity bonds that are critical to the LIHTC program. It generally preserves the status quo for NMTC, retaining the program through 2019. In fact, the bill’s elimination of the corporate alternative minimum tax should benefit the NMTC program somewhat, as these credits cannot be used to reduce the corporate alternative minimum tax. The HTC was retained at its current twenty percent level for certified historic buildings. However, whereas presently the entire credit can be claimed in a single tax year, going forward (subject to transition rules) the credit will have to be taken over five years. The credit has been repealed for buildings that are not listed on the historic register that were previously eligible for the HTC (i.e., that were placed in service prior to 1936). Finally, the new bill more or less retains current law for RETC, including the phasedown schedules for the investment tax credit and the production tax credit.
Overall, the passage of the Tax Cuts and Jobs Act was not a positive development for advocates of these programs. The bill promises to reduce the value of and demand for these credits, among other impacts. However, the given the nature of the proposals contained in the initial House bill, advocates for these programs are breathing a sigh of relief, as each of the major tax credit programs were ultimately retained and should continue to be a viable funding source for socially beneficial development projects for years to come.
To learn more about financing projects using federal tax credit programs, contact Drew Kervick.
Disclaimer: This blog post is provided for general informational purposes only and is not intended to constitute legal advice or to substitute for the advice of an appropriately licensed attorney. If the reader requires legal advice, s/he should contact a competent attorney licensed to practice in the reader’s jurisdiction. This blog post is general in nature and may not apply to particular factual or legal circumstances. The information presented is not an invitation to, and does not form, explicitly or implicitly, an attorney-client relationship.