Proposed Tax Reform Not Good for Low-Income Renters

12/19/17 Update: Today, the House passed its tax bill by a 227-203 vote. The Senate is expected to vote tonight.

Editor’s Note: This article reflects Affordable Housing Online’s analysis of the two tax reform bills passed by the Senate and House of Representatives, and how it would affect participants of low-income housing programs.

The Republican tax reform bills currently being considered in Congress will likely have a negative impact on low-income households. Both versions of the Tax Cuts and Jobs Act introduced to the Senate and House of Representatives will reduce the number of affordable rental housing units produced over the next 10 years and raise taxes for low-income households.

Key Points:

• Most low-income households will see an increase in their taxes.
• The House and Senate bills increase some benefits to low-income taxpayers but these gains are offset by eliminating other favorable tax benefits.
• Low-income households living in high-tax, high-cost states (California, New York, Maryland, and many more) will pay more taxes.
• The Senate bill eliminates Obamacare’s Individual Mandate, leading to 13 million people losing insurance coverage. Almost all of these will be in low and moderate-income households.
• The House and Senate bills will significantly reduce the number of affordable rental housing units produced over the next 10 years making it even harder for low-income Americans to find affordable housing.

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Under the House plan, low and many middle-income households will see tax increases by 2023. The Congressional Budget Office (CBO) estimates that under the Senate plan, in 2019 all income groups below $30,000 will have a higher tax burden. And by 2027, all households below $75,000 will see higher taxes. In addition, corporate tax changes will reduce the amount of new affordable housing built over the next 10 years.

Both the House and Senate seek to simplify the tax code and reduce the number of people who have to itemize their returns. The House cuts the number of brackets from seven to four while the Senate keeps the seven brackets but changes the income levels for each bracket. Under both plans, the Standard Deduction is almost doubled, while a number of other deductions are eliminated to simplify the system. The Standard Deduction is the amount taxpayers may choose to subtract from their income before it is taxed if they do not choose to itemize specific deductions. The thinking is that if the Standard Deduction is raised, families will find themselves in a better position than if they had to document lots of small deductions.

The Standard Deduction for both bills is raised to $12,000 for individuals, and $24,000 for couples. Both bills also increase the Child Tax Credit (CTC), with the Senate higher at $2,000. They both also retain the Earned Income Tax Credit (EITC), which directly benefits low-income households. Although many low-income households do not itemize, both bills repeal deductions that low-income taxpayers have commonly used. These include the personal exemption ($4,050 for an individual, $8,100 for a couple) and deductions for medical expenses, moving expenses, non-disaster casualty and theft losses, student loan interest and tax preparation. In addition, both bills repeal the deduction for state and local taxes (SALT), which includes sales and income tax. Both bills keep the property tax deduction but cap it at $10,000. Repeal of the SALT deductions will primarily impact low and middle-income households in high cost, high tax areas. These would include the New England states, New York, Maryland, New Jersey and Virginia on the  East Coast. They would also include California, Oregon and Washington on the West Coast. It has been noted by political analysts that the vast majority of taxpayers being penalized by the repeal of SALT deductions reside in Blue states that did not vote for Donald Trump.

The bills’ supporters say that the increase in the Standard Deduction will offset the loss of the personal exemption and itemized deductions and that low and moderate-income taxpayers will pay less. However, low-income households are likely to receive smaller refunds under this formula. For example, removing the personal exemption means that low-income households with three or more children will lose more benefits than provided under the increase in the Standard Deduction. Also, in both bills the additional amount provided under the CTC is not refundable, so many low-income households will not see this benefit. The bills also use a less generous factor for calculating inflation increases, the Chained Consumer Price Index, that will reduce the value of the EITC over time and further erode low-income tax refunds.

The Senate bill also proposes repealing Affordable Care Act’s (ACA’s) Individual Mandate, which requires most Americans to purchase health insurance or pay a tax penalty. This repeal is what accounts for much of the low and middle-income tax burden predicted by the CBO. The ACA provides low-income households with tax credits to purchase health insurance. Without the Individual Mandate to increase enrollment and stabilize insurance pools, insurance companies will need to raise premiums. Low-income households will have a harder time paying the higher premiums. If they decide they cannot afford health insurance, they will not get the ACA tax credits. CBO estimates that the repeal of the Individual Mandate will lead to 4 million people without health insurance in 2019, and 13 million without coverage by 2027, almost all of which are low- and moderate-income.

Both the House and Senate bills keep the Low-Income Housing Tax Credit (LIHTC), but the House bill repeals private activity bonds, which include Multifamily Housing Bonds used for affordable housing developments. LIHTCs are either issued as 9% credits on a competitive basis, or less generous 4% credits which are more plentiful but can only be used in projects with Multifamily Housing Bonds. According to the National Low Income Housing Coalition, the repeal of the private activity bonds would lead to 700,000 to 800,000 fewer affordable units produced over the next ten years. This will have a big impact on the ability of low-income renters to find affordable apartments.

Both bills lower the corporate tax rate to 20%. The LIHTC program works by selling tax credits to investors, usually banks, insurance companies and other corporations, for equity investment in affordable housing projects. The credits reduce the amount of taxes they owe. With a lower corporate income tax, the LIHTCs have less value and generate less equity for affordable housing projects. This will also reduce the number of units built with LIHTC financing, further slowing the production of affordable apartments. Novogradac has estimated that there would be a loss of roughly $2.2 billion in LIHTC equity annually, resulting in 16,000 or more fewer affordable units produced or preserved annually.

The Senate bill increases the federal deficit by $1 trillion, and the House bill by $1.4 trillion. These tax cuts must be offset by new fees and taxes or spending cuts. When meeting  with House Republicans before their tax reform vote, President Trump encouraged them to look next to welfare reform to trip deficits. On December 6, Speaker Ryan stated that the Republican priority for 2018 will be addressing the federal budget deficit and that controlling healthcare spending is the first priority. He said they will likely focus on changes to Medicaid and Medicare first. Medicaid provides health insurance for poor and disabled people and Medicare provides health coverage for seniors.

Echoing President Trump, other Republican members of Congress, including Senator Orrin Hatch, have also called for reforming  anti-poverty programs to reduce the deficit. Affordable housing programs that support low-income renters are likely to see significant cuts. These include Section 8 Housing Choice Vouchers, Public Housing and Section 8 Project-Based Rental Assistance. USDA programs that serve low-income renters, such as the Section 515 Rural Rental Housing Program and Section 521 Rental Assistance, will also likely see cuts.

The tax reform bills will increase the tax liability of poor and working class Americans in order to fund large tax cuts for corporations and wealthy individuals. It will also reduce affordable housing production and preservation. If the Senate repeal of the Individual Mandate succeeds, it will reduce access to healthcare for low-income people. Finally, low-income households will also likely feel the cuts needed to offset the tax reform deficits with cuts to affordable housing programs, Medicaid and Medicare.

On Monday, December 4, 2017, the House voted to take the two bills to conference committee. This is where House and Senate negotiators will work out differences and finalize the legislation. The conference bill then goes to each chamber of Congress for approval. The final bill would then go to the President to sign and become law.