This column is part of a series designed to carry on a discussion with Idahoans about the comprehensive tax reform efforts underway. This guest column, as well as the other tax reform-related op-eds in this series and links to cited reports and proposals, can be viewed on my official website at www.crapo.senate.gov/media/
Those following the tax reform process will hear much debate about the distributional effects of proposed reforms and how different plans will affect different income demographics. In fact, some stakeholders have drawn lines in the sand about what particular distributional effects are or are not acceptable to them. As with revenue estimates, it is also necessary to understand the capabilities and limitations of the different distributional estimating methods. Some have stated their insistence that tax reform not provide one penny in tax relief for taxpayers above a certain income threshold. Such a standard is not as easy to evaluate as one may think and may have negative consequences on efforts to provide needed assistance in our communities.
For example, in August the Senate Finance Committee held a hearing on the low-income housing crisis, which included a focus on a bipartisan proposal to expand the low-income housing tax credit, which is considered one of the federal government’s key programs for encouraging investment in the development of affordable housing for seniors and low-income families. As described by the Office of the Comptroller of the Currency, “the IRS allocates federal tax credits to state housing credit agencies based on each state’s population. The state agencies award (credits) for qualified affordable housing projects based on point systems reflecting each state’s priorities for the desired type, location and ownership of affordable housing. Project sponsors use the tax credits to raise equity from private investors. The equity investment reduces the debt burden on the tax credit property, making it financially feasible to offer lower, more affordable rents. Often institutional investors such as banks use the tax credits and real estate losses to lower their federal tax liabilities.”
The primary purpose of the program is to serve a very important public policy purpose of providing important affordable housing opportunities that would otherwise not be available to low-income Americans. But this credit also allows banks and wealthy investors to offset about $9 billion of their taxable income each year, in exchange for their capital investments in these low-income housing developments.
This is only one of many examples one could find in the tax code where Congress has developed particular credits, deductions or exemptions that are designed to serve very important, and broadly supported, public policy purposes that, if one simply follows the flow of that tax relief on paper, without taking into account the public policy effects, would be seen simply as tax relief for higher income taxpayers. As we move forward with developing comprehensive tax reform, it is important that we avoid just looking at the simple numbers on paper and also give full consideration to the broader and secondary economic and public policy effects of these proposals.