How the President’s Proposed Budget Affects Home Builders

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?

HUD

  • 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.

Labor/Immigration

  • 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.

NAHB Delivers in Lackluster Congress

Though the 113th Congress is destined to be the least productive legislative session in 40 years in terms of laws passed, NAHB was able to achieve considerable victories for our members.

A Dececember 11 article in The Hill detailing the top 10 lobbying victories of the year cited NAHB efforts to enact flood insurance reform, noting that “Congress rolled back changes to the nation’s flood insurance program enacted only two years ago, in a victory for the National Association of Realtors, the Independent Community Bankers of America, the National Association of Counties and the National Association of Home Builders, among others.

“Spurred by a spike in insurance premiums, lobbyists fought against fierce opposition from groups that said the subsidized rates from the National Flood Insurance Program could plunge the flood program that took a balance-sheet beating following Hurricane Katrina further into debt.

“Lobbyists were able to permanently roll back flood insurance premium increases that Congress enacted to help keep the program afloat.”

In 2014 alone, NAHB estimates the flood insurance law will result in:

  • $755 million more in new home construction because it is now easier for potential new home buyers to sell their existing home and trade up.
  • $361 million a year in additional remodeling activity because there is no longer added insurance expense for certain remodeling jobs.

Other Key Laws Contribute to a Builder’s Bottom Line
In addition, NAHB played an instrumental role in shepherding through Congress important legislation that helped the housing community:

Farm Bill generates $1.2 billion in additional home building and remodeling. The Farm Bill enacted into law earlier this year is a major victory for NAHB and housing. It includes an important provision championed by NAHB that will help members living and working in rural areas across the nation.

The legislation allows more than 900 communities to retain their status as “rural” areas where residents have access to important rural housing programs that help low- and very-low income households buy their own homes or find suitable rental housing. This will enable millions of Americans to maintain access to critical rural housing programs.

NAHB economists estimate that each of these 900-plus communities will receive on average more than $1 million in economic activity this year in USDA loans and grants for new construction and remodeling – funding that would have been lost had the law not been passed. In 2014 alone, it will generate an additional $1.2 billion in housing investment.

Tax extenders legislation could save builders and home owners more than $2 billion in 2014. In one of their last official acts of business before adjourning, the House and Senate approved H.R. 5771, the Tax Increase Prevention Act, which will renew scores of temporary tax provisions known as “tax extenders” that expired this year. The one-year retroactive renewal, which is through 2014 and dates back to Jan. 1, includes several provisions of interest to the housing community.

  • Section 45L Tax Credit for Energy Efficient New Homes. Provides builders a $2,000 tax credit for exceeding energy standards by 50%. The base energy code is the 2006 International Energy Conservation Code plus supplements. Section 45L is expected to save home builders $267 million in taxes for 2014 construction activity.
  • Section 25C Tax Credit for Qualified Energy Efficiency Improvements. This is a credit worth up to $500 (subject to a $500 lifetime cap), with lower caps for certain products like windows, for consumers to install qualified energy efficient upgrades. Remodelers often leverage 25C tax credits when working with clients. Section 25C is expected to save home owners who remodel $832 million in taxes for 2014 improvements.
  • Section 163 Deduction for Private Mortgage Insurance. Allows taxpayers, subject to an income cap, to deduct premiums paid for private mortgage insurance. The deduction for PMI is expected to save home owners $919 million for tax year 2014. See the full list of housing tax extenders.

Military housing can certify to the ICC 700 National Green Building Standard (NGBS).NAHB secured legislative language approved by Congress to authorize the use of the NGBS for residential construction. Project managers now have more choices when choosing green certification for new residential construction or remodeling projects, and the voluntary NGBS certification program has yet another official stamp of approval, lending more validity to state and local HBA efforts to fight green mandates.

Workforce Act Funds Training for Careers in Home Building
President Obama in July signed into law H.R. 803, the Workforce Innovation and Opportunity Act. NAHB championed this bill because it will help alleviate labor shortages in the housing industry by providing investment and resources to train workers for careers in home building and other industries. In addition, the law reauthorizes the Job Corps and Youthbuild programs as federal programs operated through the U.S. Department of Labor.

Water Resource Development Act will Improve Levees
The President in June signed into law the Water Resource Development Act. NAHB strongly supported this measure because it makes much-needed investments in our country’s underperforming levees, opening the door to new building opportunities.

This measure provides funding to enhance long-delayed flood control projects, ultimately protecting home owners in flood-prone areas. This will enable NAHB members to build homes in areas protected by better quality flood control systems. Housing markets that stand to benefit from authorization include Sacramento, Calif.; Topeka, Kan.; Fargo, N.D.; and Cedar Rapids, Iowa.

U.S. House Approves Tax Extenders Bill

By a wide bipartisan of 378-46 margin, the U.S. House last night approved H.R. 5771, the Tax Increase Prevention Act, which will renew scores of temporary tax provisions known as “tax extenders” that are set to expire this year.  Severa are of interest to the housing community. The one-year retroactive renewal is through 2014 and dates back to January 1.

NAHB is disappointed that a longer-term deal was not reached, but the political situation and the calendar have forced Congress into a one-year deal everyone hoped to avoid.

Just one week ago, Congress was headed to a bipartisan, bicameral deal which would have extended all of the expired provisions for two years through 2015. The agreement also would have made a handful of extenders, like the research and development tax credit, permanent.

Just hours after word of the agreement leaked out, the White House scuttled the deal by announcing the President would veto any bill that contained these permanent provisions.

In a letter to the House prior to the bill’s passage, your Home Builders Association urged lawmakers to support the legislation. We also expressed concern that these short-term tax bills create difficulties for our members by denying builders the certainty needed to finance complex projects and called on Congress to act quickly on a longer-term deal in early 2015

Key provisions in the tax extenders package for 2014 (retroactive to January 1) include:

  • Section 45L Tax Credit for Energy Efficient New Homes. Provides builders a $2,000 tax credit for exceeding energy standards by 50 percent. The base energy code is the 2006 International Energy Conservation Code plus supplements. Section 45L is expected to save home builders $267 million in taxes for 2014 construction activity.
  • Fixed Credit Rate for 9 percent Low Income Housing Tax Credit projects. The bill will renew the 9 percent fixed rate, but only for 2014 allocations.
  • Section 25C Tax Credit for Qualified Energy Efficiency Improvements. This is a credit worth up to $500 (subject to a $500 lifetime cap), with lower caps for certain products like windows, for consumers to install qualified energy efficient upgrades. Remodelers often leverage 25C tax credits when working with clients. Section 25C is expected to save home owners who remodel $832 million in taxes for 2014 improvements.
  • Section 179D Energy Efficient Commercial Buildings Deduction. Provides a deduction up to $1.80 per square foot for commercial buildings, including multifamily buildings built under the commercial code, that exceed specific energy efficiency minimums. The proposal also would change the baseline for the efficiency standards to the ASHRAE/IESNA 90.1-2007 standards.
  • Section 163 Deduction for Private Mortgage Insurance. Allows taxpayers, subject to an income cap, to deduct premiums paid for private mortgage insurance. The deduction for PMI is expected to save home owners $919 million for tax year 2014.
  • Bonus Depreciation. Extends the 50 percent bonus depreciation.
  • Section 179 Expensing. Increases the maximum expensing amount to $500,000 for qualified property on up to $2 million in property placed in service.
  • Short-sale mortgage debt forgiveness. The provision would extend through 2014 the exclusion from gross income of a discharge of qualified principal residence indebtedness due to a short sale.

The Senate is expected to take up and pass H.R. 5771 next week.

Request for Information on Flood Insurance Rates

We are well aware of the shocking price increases some properties are facing for flood insurance policies in 2014. Your HBA is working to get Congress to mitigate these changes, and we may have some windows of opportunity to raise the profile of this problem with Congress in the coming weeks.

What we need, however, are some specific examples of price increases. We are aware of plenty of anecdotal stories, as is Congress, but we lack pricing information linked to a specific property.

If you are running into problems with flood insurance, you may be able to help.

What we need: is documentation showing the current policy’s rate and the new rate. We don’t need the property owner’s name but must have the address.

Any information shared with us will be shared with congressional committee staff and, very likely, FEMA. We realize this may make some property owners uncomfortable, but there is always the possibility that FEMA will review and adjust it in light of a congressional inquiry!

It would be incredibly helpful to have some documented case examples to highlight the problem.

Congress by the numbers

The most active Congress, as measured by the number of bills passed into law, excluding private bills, was the 84th (1955-1956) which passed 1,028 bills. Eisenhower (R) was President; Lyndon Johnson (D) was Senate Majority Leader and Sam Rayburn (D) Speaker of the House. The least active was the 112th (2011-2012) which passed 238 bills. The current 113th Congress is on a pace to pass just 70!

Source: Elliot F. Eisenberg, Ph.D.
GraphsandLaughs, LLC
www.econ70.com