Tax reform talk has chilling effect on tax credit programs
The potential for changes to the corporate income tax structure under the Trump administration is having a chilling effect on the market for tax credits, as some investors are holding off on buying the credits in anticipation of having a lower tax burden by the end of the year.
At Stonehenge Capital, a local finance company that specializes in tax credits, investors are either taking a wait-and-see approach to investing in tax credits or they’re buying fewer of them, according to Stonehenge Managing Director Gordon “Skeet” Leblanc.
“People don’t know what their corporate income taxes or their depreciation schedules are going to be,” he says. “So some people are sitting on the sidelines, though the majority just factor that in and buy fewer credits.”
Stonehenge specializes particularly in selling New Markets Tax Credits and historic building tax credits. Leblanc says he doesn’t think either program has been adversely affected yet, but that could change if corporate tax reform is dramatic or if, as some fear, the programs are eliminated altogether.
“People are watching this very closely,” he says.
House Republicans have proposed cutting the current corporate tax rate of 35% to 20%, and President Donald Trump has promised to go even lower. For investors, buying tax credits now would represent a loss if and when the corporate tax rate falls.
The potential changes are particularly problematic for the Low Income Housing Tax Program, which is a tax credit program the federal government uses to create new affordable housing in communities around the country.
Keith Cunningham, executive director of the Louisiana Housing Corporation, which administers the program in Louisiana, says developers who already had purchased credits and have projects in the pipeline are stuck because they’re having a hard time selling the credits to investors and generating the cash they need to begin construction.
“Some projects can absorb it and some aren’t able to fill that gap,” Cunningham says. “These are projects that were in the pipeline and the value of those credits has dropped … so we have problems with these deals coming to completion.”
One example is that East Baton Rouge Housing Authority’s River South multifamily complex, a mixed-income project of 46 affordable housing and market rate units off Nicholson Drive, across from the Water Campus. The agency was planning to use LIHT credits to finance the project but has since been pursuing other options.
Cunningham is hopeful investors will again start buying tax credits when the tax reform picture becomes more clear, even though that could realistically be months away.
“We believe this will stabilize we just don’t know when,” he says. “In the meantime, we intend to meet with all the developers and work with the syndicators and our investors and try to come up with solutions that will create affordable housing.”