President Obama on Feb. 2 unveiled a nearly $4 trillion fiscal 2016 budget proposal that includes $650 billion in tax increases to pay for infrastructure and tax breaks geared toward middle class households. The administration is also proposing to eliminate sequestration and increase non-defense and defense discretionary spending. To pay for this, the White House is proposing $1.8 trillion in tax hikes and other offsets and savings, including $400 billion in healthcare expenditure reductions.
We have heard the pundits discuss the proposal, mostly in terms of the political impact. But how does the President’s proposal affect Home Builders?
- Proposes $49.3 billion in funding, an 8.7% increase over the fiscal 2015 approved appropriation.
- Increases funding for the HOME program from $900 million in fiscal 2015 to $1.06 billion.
- Decreases Community Development Block Grant funding from $3.07 billion to $2.88 billion.
- Restores approximately 67,000 Housing Choice Vouchers lost in 2013 due to sequestration.
- Supports a shift of Section 8 Project-Based Rental Assistance funding from a fiscal to a calendar year basis.
- Estimates that FHA’s Mutual Mortgage Insurance Fund, which supports FHA single-family programs, will grow by $14 billion over the next two years.
- Describes the recent decrease in the annual mortgage insurance premium for FHA-insured single-family loans from 135 to 85 basis points, which the administration estimates will allow an additional 250,000 low- and moderate-income borrowers to become home owners.
- Business and Individual Tax Provisions
- Limits the amount of capital gain deferred under section 1031 from the exchange of real property to $1 million (indexed for inflation) per taxpayer per taxable year.
- Characterizes carried interest as ordinary income.
- Recommends extending the exclusion from income for cancellation of certain home mortgage debt until the end of 2017.
- Limits the value of certain tax expenditures to 28% of exclusions and deductions that would otherwise reduce taxable income in the 33%, 35% or 39.6% tax brackets.
- Increases the highest long-term capital gains and qualified dividend tax rate from 20% to 24.2%. The 3.8% net investment income tax would continue to apply. The maximum total capital gains and dividend tax rate including net investment income tax would thus rise to 28%.
- Imposes a new minimum tax, called the Fair Share Tax (FST), on high-income taxpayers. The tentative FST would equal 30% of AGI less a credit for charitable contributions.
- Recommends increasing the estate, generation-skipping transfer (GST) tax, and gift tax top tax rate to 45% with an exclusion amount of $3.5 million for estate and GST taxes, and $1 million for gift taxes. There would be no indexing for inflation.
- Requires a contractor receiving payments of $600 or more in a calendar year from a particular business to furnish to the business (on Form W-9) the contractor’s certified taxpayer identification number (TIN). A business would be required to verify the contractor’s TIN with the IRS.
- Repeals Section 530 of the Revenue Act of 1978, which provides an explicit safe harbor for employers when classifying workers as employees or independent contractors.
Energy Tax Provisions
- Calls for extending and updating the current 179D deduction for energy-efficient commercial buildings, including multifamily buildings.
- Recommends extending the Section 45L tax credit for energy efficient new homes.
Low Income Housing Tax Credit Proposals
- Allows states, based on a formula, to convert up to 18% of their private activity bond volume cap into 9% credits.
- Allows LIHTC projects to serve individuals earning up to 80% of area median income (AMI) as long as the average income of all tenants remains no more than 60% of AMI.
- Opposes fixing the 9% credit rate. Instead, recommends a new way to calculate the floating rate for both the present value applicable percentage and the 30% present value applicable percentage, but only with respect to allocated LIHTCs. Under the proposal, the discount rate to be used would be the average of the mid-term and long-term applicable federal rates for the relevant month, plus 200 basis points.
- Adds the preservation of federally assisted affordable housing as an eleventh selection criterion that qualified allocation plans must include.
- Allows HUD to designate as a qualified census tract (QCT) any census tract that meets the current statutory criteria of a poverty rate of at least 25% or 50% or more of households with an income less than 60% of AMI. That is, the proposal would remove the current limit under which the aggregate population in census tracts designated as QCTs cannot exceed 20% of the metropolitan area’s population.
- Occupational Safety and Health Administration
- Provides a 7% increase over the 2015 enacted level to $592 million.
- Requests 40 new OSHA staff to support the investigations (i.e., inspections) resulting from the new injury reporting requirements, which require employers to report work-related hospitalizations, amputations and losses of an eye.
- Emphasizes the need to strengthen worker misclassification programs, including new penalties for recordkeeping violations and a focus on “high-risk” and “fissured” industries, such as construction. The budget seeks $10 million to strengthen worker misclassification programs at the state level.
- Calls on Congress to act on comprehensive immigration reform this year. The administration supports the Senate approach taken in 2013, which includes the limitation of a workable visa plan for the construction industry.
- Includes $2 billion for the Paid Leave Partnership Initiative to assist up to five states that wish to launch paid leave programs. Participating states would be eligible to receive funds for the initial set-up and half of the benefit costs of the program for three years. The budget also includes a $35 million State Paid Leave Fund to provide technical assistance and support to states that are still building the infrastructure they need to launch such programs in the future.
It is important to note that no Executive Budget is ever enacted “as is” by Congress and this budget may not be enacted at all because Republicans control both the House and the Senate. Given the size, cost, complexities and major policy overhauls that this blueprint entails, the battle ahead is likely to be contentious as lawmakers on both sides of the aisle debate its merits on an array of fronts — from social spending to energy policy to taxes.
Your HBA will remain deeply engaged as the budget process moves forward, fighting to strip out any provisions that will harm housing and promoting elements that will help small businesses and the housing sector.