Benefits Far Outweigh Costs for Tax Incentives Promoting Community Development, Affordable Housing and Historic Preservation

Published by Peter Lawrence on Wednesday, December 27, 2023 - 8:13AM

The Joint Committee on Taxation (JCT) released Dec. 7 its Estimates of Federal Tax Expenditures for Fiscal Years 2023-2027. Prepared (usually) annually, the report details individual and corporate tax expenditures, including the low-income housing tax credit (LIHTC), historic tax credit (HTC), renewable energy production tax credit (PTC) and investment tax credit (ITC), new markets tax credit (NMTC), as well as the opportunity zone (OZ) incentive. As detailed later in this post, the benefits of these incentives far outweigh their costs.

The most recent report covers federal tax expenditures enacted through Aug. 31, 2023. 

Impact of the Inflation Reduction Act

The enactment of provisions created or modified by the Inflation Reduction Act (IRA) of 2022 have significantly increased the amount of expenditures in renewable and clean energy tax incentives. The IRA introduced several new tax credits such as the clean electricity ITC, a technology neutral tax incentive that will replace the traditional ITC starting in 2025, the Section 45X advanced manufacturing production credit,  and the Section 45V credit for production of clean hydrogen. The JCT report for 2023-2027 is the first to fully incorporate the effect of IRA on those renewable and clean energy tax incentives. 


The total estimate for 2022-2026 for both the ITC and PTC combined was $48.8 billion, but estimates for 2023-2027 are significantly higher. The 2023-2027 estimates totaled $39.3 billion for the PTC, $72.6 billion for solar ITC and $14.8 billion for the clean energy ITC. Adding just those estimates together for a total of $126.7 billion is more than 2.5 times the estimate for 2022-2026. That total does not include various estimates for subcategories of ITC estimates, such as interconnection property, qualified Section 45 property, energy storage and others. 

In addition, the Section 45X advanced manufacturing production credit, Section 45Q carbon dioxide sequestration credit and the Section 45V credit for production of clean hydrogen, among other clean energy tax incentives, were included in this report’s five-year estimates.

The total 2023-2027 estimates for these credits as well as other renewable energy tax expenditures are displayed in the table below. 

Blog graphic: Selected Clean Energy Tax Expenditures

Since its inception in 2006, the ITC has created more than 200,000 jobs, generated $140 billion in investment, increased solar deployment by more than 10,000% and grown by an average annual rate of 52% each year, according to the Solar Energy Industries Association (SEIA). SEIA also reports that the ITC has financed 162 gigawatts (GW) of solar capacity nationwide, which is enough to power 30 million homes.

According to American Clean Power, 460,000 jobs have been created because of clean energy, while costs associated with wind and solar energy development have declined by 70% and 90%, respectively, since 2009. In 2022, 336 million metric tons of carbon dioxide emissions were also avoided due to wind energy, accounting for a quarter of the electricity produced in the United States. The ITC and PTC have been essential in realizing these benefits by making clean energy affordable in a competitive market, and the IRA clean energy incentives will be essential if the United States is to meet its climate goals.

While the Section 45Q carbon dioxide sequestration credit is not new, it was modified and substantially enhanced by the IRA. The ITC was expanded to include interconnection property and energy storage, among other types of energy property. The Section 45Q carbon oxide sequestration credit covers any carbon capture, direct air capture, or carbon utilization project beginning construction before Jan. 1, 2033. The Section 45X advanced manufacturing production tax credit covers the production of key energy facility components, such as photovoltaic modules and some of its subcomponents, inverters, tracking system components, batteries and certain critical minerals. Additionally, the Section 45V credit for the production of clean hydrogen is measured by the product of the kilograms of qualified clean hydrogen produced by the taxpayer at a qualified facility. 

The ITC was expanded to include interconnection costs, where a qualified interconnection property can be defined as “a tangible property, excluding microgrid controllers, that is part of an addition, modification, or upgrade to a transmission or distribution system to facilitate interconnection, which is constructed, reconstructed, erected, or financed by a taxpayer and originally used by a utility under an interconnection agreement.” The IRA also allows taxpayers to claim a Section 48 ITC in lieu of the Section 45 PTC. While this option is not new, long-term expansions of the PTC and ITC encourage greater utilization of the option among both larger and smaller firms. 

LIHTC, NMTC, HTC and OZ Costs are Overshadowed by Individual and Other Corporate Tax Expenditures

The tables below display the 10 largest individual total tax expenditures and the 10 largest corporate total tax expenditures. Corporate tax expenditures are defined as the tax expenditures that were primarily or exclusively claimed by corporations, while individual tax expenditures are primarily or exclusively claimed by individual taxpayers (which includes passthroughs and other non-corporate taxpayers). The individual tax expenditures from 2023-2027 are approximately nine times the amount of corporate tax expenditures, a lesser ratio than last year’s estimates

Blog graphic: 10 Largest Individual Total Tax Expenditures

In the corporate tax expenditures table below, “Depreciation of equipment in excess of the alternative depreciation system” did not appear among the 10 largest expenditures though it placed second among the five year estimates provided in 2022. This is a result of the scheduled phasedown on 100% bonus depreciation over 2023-2026. Further, “Investment energy credit for solar” notably moved from sixth to third place between the five-year estimates from 2022-2026 and 2023-2027. Combined, the renewable energy tax credits on the list of the 10 largest expenditures amounted to $230.1 billion, which is just slightly larger than the largest single corporate tax expenditure, the reduced tax rate on active income of controlled foreign corporations. 

Blog graphic: Ten Largest Corporate Total Tax Expenditures

Listed below are updated estimates for community development tax expenditures, including the LIHTC, NMTC, OZ and HTC.

Blog graphic: Community Development Tax Expenditures

These tax incentives provide a plethora of benefits to communities and households: providing affordable housing, stimulating private investment in underserved communities, investing in distressed communities and preserving historical buildings and town centers. 

LIHTC

Since the inception of the LIHTC in 1986, it has financed the development of more than 3.7 million apartments and provided homes to more than 8 million low-income families, according to the National Council of State Housing Agencies

NMTC

According to the Community Development Financial Investment (CDFI) Fund, the NMTC generates more than $8 of private investment for every $1 invested in the NMTC. In calendar year 2022, the NMTC generated a total of 52,800 jobs, including 29,210 permanent full-time equivalent jobs and 23,612 construction jobs, according to the NMTC Coalition. In the 2022 round alone, $5 billion was awarded to 102 awardees, with $2.35 billion for planned major urban investments, $1.24 billion for planned minor urban investments and $1.32 billion for planned rural investments, according to the U.S. Treasury’s CDFI Fund.

OZ

Thus far, QOFs have reported $3.12 billion in new equity raised within the first three quarters of 2023, with more than $37 billion in funds  raised by QOFs from May 2019 (the date in which Novogradac began gathering information on OZ equity raised) to September 2023.

HTC

According to National Park Service’s (NPS) most recent annual HTC report, the two-year total expenditures from 2021-2022 were the highest in its 45-year history. NPS reported an estimated $6.56 billion in rehabilitation costs for historic buildings in 2022 and $7.16 billion in estimated rehabilitation costs in 2021, for a total of $13.72 billion. According to the report, $122.9 billion has been estimated in rehabilitation investment from FY 1977-2022, rehabilitating 308,039 homes and creating 343,403 new homes. Additionally, the HTC has funded the creation of 192,314 low- and moderate- income homes and has rehabilitated 48,293 certified historic properties.

Housing Tax Expenditure Estimates Rise

The five-year homeownership tax expenditure estimates increased from $540.4 billion for 2022-2026 to $655.7 billion for 2023-2027. The 2023-2027 homeownership tax expenditure estimates are also more than six times as large as rental housing tax expenditure estimates, accounting for a larger share of current housing tax expenditures than in the 2022 estimates. Estimates for the deduction for property taxes on real property notably jumped by a factor of 1.7 from 2022 to 2023 because of the pending expiration in 2025 of the annual $10,000 cap on state and local tax deduction. 

After 2017, the JCT stopped reporting the deduction for property taxes on real property as a separate tax expenditure estimate. Since then, Novogradac has estimated the amount for this tax expenditure by taking the percentage of property tax deductions to overall deduction of state and local government taxes seen prior to the passage of the Tax Cuts and Jobs Act (TCJA) and applying it to current JCT tax expenditures of state and local deductions. The $191.4 billion shown in the table below is likely an underrepresentation of the actual property tax deductions. 

Additionally, the TCJA affects the size of the mortgage interest deduction. Since 2017, the size of the mortgage from which mortgage interest can be deducted was reduced from $1 million to $750,000. That reduction also expires at the end of 2025.
However, the estimate on the capital gains exclusion on the sales of principal residences declined, likely because of the changes in the homeownership market, which has been affected by the rapid increase in mortgage rates in the last 18 months, resulting in a sharp reduction in single family home sales. The tax expenditure estimate for private activity bonds for homeownership was also likely affected by the changed homeownership market.

Blog graphic: Housing Tax Expenditures

Trends in Itemized Deductions

The decrease in tax expenditure estimates of certain itemized deductions that were ushered in with the enactment of the TCJA, have been reversing in the past two sets of JCT estimations. This year saw a significant 69.2% increase in the estimate for deductions of nonbusiness state and local government taxes. Deductions for both charitable contributions other than for education and health and deductions for nonbusiness state and local government taxes have increased to well beyond their 2016-2020 estimates. The increases in nonbusiness state and local government taxes deductions are also likely the result of the annual $10,000 cap on deductions for state and local taxes is expiring in 2025. This year’s estimates are the first where the tax expenditure estimates for itemized deductions have largely reached pre-TCJA levels.

Blog graphic: Itemized Deductions

Outlook for 2024

Because the LIHTC, NMTC, HTC OZ, ITC and PTC generate substantial benefits for households and communities relative to their costs, they should continue to enjoy bipartisan support and be sustained by the federal government for years to come. 
In early 2024, there is a possibility for a bipartisan, bicameral tax bill that would affect housing and community development tax expenditures. This could increase tax expenditures for the LIHTC, NMTC, HTC and OZs. Additionally, the proposed neighborhood homes tax credit (NHTC) and the workforce housing tax credit (WHTC) could be included in this legislation. The NHTC would finance affordable owner-occupied single family homes in distressed communities, while the WHTC would establish a new tax credit to finance affordable rental housing for households earning more than the traditional LIHTC income limits and up to 100% of the area median income. 

 

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