Reading an Early Draft of the Stimulus Bill Conference Report: Compromise Provisions (Part II)–Safety Net Tax Relief

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Homebuyer tax credit:  First time homebuyers (married filing jointly, with incomes up to $150-170,000) had been eligible for a limited-time refundable tax credit on home purchases of up to the lesser of $7,500 or 10 percent of the purchase price of a home used as a principal residence (purchased between April 9, 2008 and July 1, 2009, a timeframe enacted last year to boost the sagging housing market).  The credit however was designed to be “recaptured” over time, essentially reflecting what government anticipates as the increasing value of the home.  The stimulus compromise increases the maximum credit to $8,000 for home purchases after December 31, 2008 and before December 1, 2009 and eliminates the recapture provisions so long as the homebuyer uses the home as a principal residence for 36 months from the date of purchase.  This is much lower–and less costly–than the $15,000 homebuyer tax credit that the Senate had endorsed based on an amendment from Georgia Republican Johnny Isakson (who nonetheless voted against the bill).

Low Income Housing Tax Credits:  During this recession, the market for Low Income Housing Tax Credits has dried up.  Typical purchasers of low income tax credits, particularly banks and the secondary market institutions such as Fannie Mae and Freddie Mac, have lower profits (actually losses) and therefore less interest in buying credits or are out of the tax credit game entirely.  In the past, when a developer might sell a $1 of tax credits and get perhaps as much as 90 cents to put into the cost of the development, the tax credit market now is generating significantly lower prices, frequently less than half that. By some estimates, with the economic downturn, the $8 billion low income housing tax credit market has shrunken to $4 billion.   With CRA-motivated investors such as banks largely out of the LIHTCgame for the moment, Congress focused on how to make tax credits more attractive to what might be termed “economic investors”.

The compromise stimulus bill would allow states to essentially trade in as much as 100 percent of their unused 2008 tax credits and 40 percent of their 2009 tax credits for a one-time federal grant of 85 cents for each dollar of tax credit authority.  The attraction for stimulating housing development is obvious–85 cents of grant dollars is much more useful than what could be 70, 60, 50, or 40 cents from a tax credit sale.  In addition, the program would allow these tax credit substitute grants to be used on low income projects that were not housing tax credit projects.

Recognizing the importance of housing production to the nation’s economic revival, the two chambers aimed at additional incentives for the tax credit program.  The compromise bill allocates $2.25 billion through the HOME program as “gap filler” moneys aimed at getting existing but stalled low income tax projects into production.  However, the stimulus eliminated Senator Maria Cantwell’s “accelerated” tax credit amendment that would have allowed purchasers to claim the value of the credit, by law spread over 10 years, in the first 3 years.  That would have jump-started the moribund tax credit market by making the credit more attractive to potential purchasers.

Why is this important to nonprofits?  Because about one-third of Low Income Housing Tax Credit units have been developed by nonprofit sponsors.  Why nonprofits?  They can’t use the tax credits, since as nonprofits, they don’t pay taxes, but they can and do sell the credits to investors.  Nonprofit developers use the tax credit sales as crucial subsidies to make the housing more affordable, reaching lower-income households.  This provision of the conference billreviving the Low Income Housing Tax Credit market will be important to nonprofits across the country.

Earned Income Tax Credit:  The bill contains an expansion of EITC benefits for families, basically making EITC available for eligible families with 3 or more children at a level as high as 45 percent of eligible earnings (previously 40 percent) and phases out EITC eligibility at a higher level for families than currently permitted.

Work Opportunity Tax Credit:  The WOTC is available to employers for hiring employees from any of 9 targeted groups (meeting specified eligibility timeframes):  families receiving Temporary Assistance for Needy Families (TANF), veterans with service-related disabilities, veterans receiving Food Stamps, qualified “ex-felons” (the term used in the conference report, not the term of choice in the Cohen Report), qualified residents living in designated Empowerment Zones or Enterprise Communities, vocational rehabilitation referrals, qualified summer youth employees, other qualified Food Stamp recipients, certain individuals receiving Supplemental Security Income (SSI) benefits, and specified “long term” (usually 18 months or more) family assistance recipients.  Generally, the employer is entitled to a credit of 40 percent of the employee’s qualified first-year wages not more than $6,000, basically a maximum credit of $2,400 per employee (or half that for summer employees)–the top amount of qualified wages is higher for long term family assistance recipients ($10,000, plus the employer is able to take a credit on second-year wages too) and for qualified veterans ($12,000).

The conference bill adds two new categories of WOTC employee eligibility:  unemployed veterans (regardless of disability status) and “disconnected youth” who begin work for the employer claiming the credit in 2009 or 2010.  The eligibility definitions are as follows:  Unemployed veterans “(1) [have] served on active duty (other than for training) in the Armed Forces for more than 180 days or who has been discharged or released from active duty in the
Armed Forces for a service-connected disability; (2)…been discharged or released from active duty in the Armed Forces during the five-year period ending on the hiring date; and (3)…received unemployment compensation under State or Federal law for not less than four weeks during the one-year period ending on the hiring date.”  The House bill defined a WOTC-eligible disconnected youth asbetween 16 and 25, not regularly attending secondary, technical, or post-secondary school for the 6 months prior to the hiring date, not regularly employed during that 6 month period, and lacking “a sufficient number of skills” for employability.  The conference report added that a low level of eone: (1) at least age 16 but not yet age 25 on the hiring date; (2) not regularly attending any secondary, technical. or post-secondary school during the six-month period preceding the hiring date; (3) not rcgularly cmployed during the six-month period preceding the hiring date; and (4) not readily employable by reason of lacking a sufficient number of skills. For purposes of the disconnected youths, it is intended that a low-level of formal education would “satisfy the requirement that an individual is not readily employable by reason of lacking a sufficient number of skills.”

The WOTC has been controversial in the past, sometimes deridingly called “the Burger King tax credit”, giving employers a credit for hiring people they would have hired anyhow.  Though the Clinton Administration continued and modified the WOTC to address what was seen as an unnecessary corporate subsidy, it isn’t clear that the modifications worked.  For stimulus purposes, making the WOTC work as something more than an unnecessary corporate subsidy will be an important monitoring issue for nonprofits in inner city and rural communities.

American Opportunity Tax Credit (Hope credit):  Current law allows eligible taxpayers a credit of up to $1,800 for post-secondary tuition and related expenses with eligibility phased out for taxpayers with AGIs of $50-60,000 or married filing jointly of $100-120,000.  The compromise bill follows the House bill raising the maximum possible credit to $2,500 and increasing the threshold for income eligibility to individual AGIs of between $80,000 (married filing jointly $160,000); partial credits are available for incomes up to $90,000 (married filing jointly up to $180,000).  This is a temporary increase only for 2009 and 2010.  In addition, the Pell Grants for college tuitions are increased to $5,350 in 2009 and $5,550 in 2010.

There are other family-focused tax provisions in the stimulus bill, including the “Making Work Pay” credit.   This refundable tax credit (meaning that if a taxpayer doesn’t pay enough taxes to take the credit against, the balance may still be claimed and paid to the taxpayer) is for $400 per worker or $800 for dual-earner couples, with full eligibility for people making up to $75,000 (or $150,000 for couples), and partial eligibility for workers earning up to $100,000 ($200,000 for couples).

Also included is a temporary “fix” of the Alternative Minimum Tax (AMT), which really benefits even higher income taxpayers–and doesn’t do much if anything to stimulate the economy.

The final stimulus bill that President Obama will sign contains a mix of tax and spending elements that we all hope will change the course of the nation’s downward economic spiral.  Nonprofits have a role in helping implement the stimulus strategy–and making sure that they monitor it to keep it on track for the job creation and economic activity purposes it should primarily address.