By Cindy Vosper Chetti, Senior Vice President, Government Affairs, NMHC
On March 9, President Biden unveiled his 2024 budget proposal, which aims to “invest in America, lower costs and cut taxes for working families, and protect and strengthen Medicare and Social Security.” Importantly, the budget includes several provisions that would impact our industry and the renters we house.
What We Think: In step with this Administration’s overarching focus on housing affordability, the budget has called for historic investments in housing—with a specific focus on increasing our Nation’s housing supply. NMHC applauds the Administration for this focus and looks forward to working together to implement a multi-faceted approach to meet housing demand. However, we are disappointed that this Administration is pursuing pay-fors targeted at the housing industry, yet again. Congress rightly did not enact these tax proposals in 2021 or 2022, and doing so now would only reduce funds available to develop and manage real estate, an enterprise that often includes significant risk.
What’s Next: After the president submits his budget, the House and Senate Budget Committees each write and vote on their own budget resolutions. The budget resolution sets the year's spending limits for the 12 main areas of federal discretionary spending. House and Senate Appropriations committees put together 12 detailed appropriations bills representing 12 separate areas of government. The House and Senate each vote on the 12 appropriations bills and iron out their differences, and the President signs each of the 12 appropriations bill. Then, the budget becomes law.
This is the way that the process is supposed to work, but it rarely goes according to plan. In fact, while Congress may successfully enact some of the 12 appropriations bills, the last time Congress completed all bills on time was 20 years ago, in 1996. Instead, Congress is often forced to pass Continuing Resolutions to keep all, or parts, of the government funded.
- The Senate Appropriations Transportation, Housing and Urban Development Subcommittee held a April 20 hearing titled, “A Review of the President’s Fiscal Year (FY) 2024 Funding Request and Budget Justification for the US Department of Housing and Urban Development.” Featuring testimony from HUD Secretary Marcia Fudge, the discussion focused on affordable housing supply, various HUD programs and the agency’s FY2024 budget request.
- The House Energy and Commerce Innovation, Data, and Commerce Subcommittee held a hearing on April 18 to examine the FY24 Federal Trade Commission Budget. Of interest to the apartment industry, much of the discussion focused on FTC’s engagement on data privacy and security. Notably, the FTC is in the preliminary stages of a Commercial Surveillance and Data Security rulemaking and has called out algorithmic bias and discrimination and its impact on housing.
State of Play: These days, Presidential budgets are considered messaging documents and are declared “dead on arrival.” As of this writing, it is unclear what the path forward will be for passage of this year’s budget. In fact, the newly divided Congress suggests that the President may face even more pushback than he has in previous years. Too early to tell how many, if any, of the 12 appropriations bills will be enacted this year.
With that said, significant work is expected on issues pertaining to housing such as funding for key housing programs such as the Housing Choice Voucher Programs, HOME, CDBE, the National Flood insurance Program, FHA Multifamily programs and countless others.
What We’re Doing: NMHC and NAA will continue to be engaged to ensure that critical programs important to the industry receive the funding that is needed. Further, we will continue to push for positive tax related policies like LHITC and MIHTC designed to increase the supply and against tax policy that would hinder development and preservation.
Use the drop-down feature below to learn more about key provisions included in the President’s budget that could be impactful to our industry.
- $10 billion for planning and housing capital grants to incentivize states and localities to remove development barriers—such as exclusionary zoning and onerous permitting processes.
- $85 million in discretionary funds to reward states and localities that remove development barriers.
- $32.7 billion for HCV—this is a $2.4 billion increase that serves 50,000 more families
- $25 million for “mobility-related support services”
- $13 billion over a ten-year period for extremely-low-income veterans
- Increasing annual credit allocations;
- Reducing the bond financing threshold to 25 percent from 50 percent to receive the full amount of 4 percent LIHTCs;
- Repealing the qualified contract provision effective as the date of the enactment.
- Repealing the right of first refusal and replace it with an option safe harbor, effective for agreements entered into or amended after the date of enactment. The Budget notes that “The Administration will work with Congress to develop an approach appropriate for existing agreements.”
Reduce Barriers to Development
The proposal includes a number of funding mechanisms that aim to break down barriers and increase the affordability of housing:
NMHC’s Take: For years, NMHC has educated lawmakers on the unintended consequences of onerous and duplicative regulations. With regulations accounting for an average of 40.6% of total multifamily development costs, we believe this proposal will help further support the creation of multifamily housing that is affordable.
Expand Housing Options for Low-Income Renters through Housing-Choice Vouchers (HCV)
The budget allocates the following for various voucher programs:
In addition, it also proposes the a new HCV program for all youth aging out of foster care.
NMHC’s Take: NMHC supports expanding funding for the HCV program, as well as efforts to address reform efforts intended to encourage greater landlord participation.
Provide New Funding for Project-Based Rental Assistance (PBRA)
The budget proposes $7.5 billion in funding for new PBRA contracts to help support the creation of new affordable housing.
NMHC’s Take: Rental assistance – both project-based and tenant-based – is a critical tool in the housing affordability toolbox that helps support those most in need. Specifically, we believe that project-based assistance is a crucial source of support that provides long-term assets dedicated to housing persons of low income—free from the fluctuations in availability and price to which the general housing market is subject.
Expand the Low-Income Housing Tax Credit (LIHTC)
The Budget proposes to expand and enhance LIHTC by:
However, that provision would not apply if before 2024: (1) a building received a housing credit; or (2) “in the case of a building some portion of which is financed with PABs [private activity bonds] subject to volume cap, the building received a determination that the LIHTCs received on account of the PAB financing would be necessary for the building’s financial feasibility and continued viability, and that an allocation of HCDAs would have been permissible in the absence of PAB financing;” and
NMHC’s Take: NMHC has long-advocated for a reduction in the bond financing requirements so that housing providers can take full advantage of the 4 percent credit and create additional, much-needed affordable housing.
Fund Local Fair Housing Efforts
Included as part of the discretionary funds, the proposed budget includes $90 million to support state and local initiatives to further outreach, education and training on Federal fair housing laws.
NMHC’s Take: NMHC is committed to fair housing goals and supports efforts to provide property owners and managers with the resources needed to understand and comply with fair housing responsibilities. However, funding should focus on tools and policies that clarify fair housing requirements and avoid efforts that would expand regulatory burdens, promote inconsistent or ineffective testing and create uncertainty about the fair housing impacts of necessary business practices.
Increase HUD & USDA Housing Program Funding
The budget proposes a $300 million bump in HUD’s Home Investment Partnership Program (HOME) funding, bringing the program funding up to $1.8 billion. It also includes a $283 million increase in the USDA’s housing program, with a focus on improving the energy and water efficiency of multifamily buildings.
NMHC’s Take: HOME and USDA Rural Housing programs allow developers to address financing shortfalls often associated with affordable housing properties and stimulate meaningful development and preservation activity as a result.
Encourage State and Local Eviction Mitigation Reform
The proposal sets aside $3 billion in funding to support state and local eviction mitigation programs—“with a focus on upstream prevention and eviction diversion, improving renters’ access to resources, and making the legal process for renters fairer.” Importantly, this funding can also be used for current emergency rental assistance programs, new models of rent relief and legal assistance.
NMHC’s Take: NMHC is committed to furthering housing stability and affordability and supports efforts to help residents facing financial hardship find the solution that’s right for them. We believe that the key to avoiding many evictions is support for residents in need before they ever face an eviction action. However, we caution against the use of funding to artificially interrupt or lengthen the eviction process or otherwise create obstacles for housing providers to regain possession of a property.
Many of the tax proposals included as pay-fors in this year’s budget are reappearing after having been unable to clear a Democratically controlled Congress in 2021 and 2022. While these tax increases face long odds to enactment in a Republican-controlled House of Representatives, they nonetheless reflect the Administration’s views on tax policy and, should President Biden win reelection, will be in play in 2025 when major provisions of the Tax Cuts and Jobs Act expire.
While NMHC appreciates the President’s focus on housing investment, we are deeply concerned about the potential impacts the following pay-fors would have on such investment. At a time of widespread housing unaffordability fueled by a lack of housing supply, we should not be financially penalizing the very industry responsible for creating said supply. Doing so will only further hinder our industry’s ability to provide housing that is affordable for the millions of Americans that so desperately need it.
Marginal Income Tax Rates
The budget would increase the top statutory marginal income tax rate to 39.6 percent from 37 percent effective for taxable years beginning after 2022. The increased tax rates would take effect for single filers earning over $400,000 and married filers earning over $450,000. Absent legislation, today’s 37 percent rate reverts to 39.6 percent beginning in 2026 under current law. The 20 percent qualified business income deduction, which effectively reduces today’s top 37 percent rate to 29.6 percent, expires at the end of 2025 as well. It should be noted that today’s top 37 percent tax rate does not apply until a single filer earns over $578,125 and a married filer earns over $693,750.
Capital Gains Tax Rates and Taxation of Unrealized Capital Gains at Death
The budget proposes to tax capital gains and qualified dividends at ordinary income tax rates for taxpayers earning over $1 million. The proposal would be effective for gains recognized and dividends received on or after the date of enactment.
Combined with the Administration’s proposals to expand the incidence of and increase the rate of the net investment income tax (see below), the proposal would raise the top tax rate on long-term capital gains and qualified dividends to 44.6 percent from today’s rate of 23.8 percent (20 percent statutory rate plus 3.8 percent net investment income tax rate).
In addition, the proposal would impose a tax on unrealized capital gains at death. Taxpayers would be allowed to exclude $5 million in assets ($10 million per couple) in addition to $250,000 (single taxpayers) / $500,000 (married taxpayers) of the value of a principal residence. A 15-year fixed payment plan would be available with respect to assets other than liquid assets, and taxation of unrealized gains on family-owned businesses could be deferred until the business is sold or no longer family operated.
The budget proposes to tax carried interest as ordinary income as opposed to capital gains if a taxpayer’s income exceeds $400,000. The proposal would be effective for taxable years beginning after 2023.
Application of Net Investment Income Tax on Active Income and Increase in Rate
The budget proposes to expand the current-law net investment income tax to include net investment income (i.e., capital gains, interest, dividends, annuities, royalties, and rents) earned in the ordinary course of a trade or business phased in for taxpayers earning over $400,000 and fully phased-in for taxpayers earning over $500,000. It would not apply to any wages on which SECA is currently imposed. The proposal would be effective for taxable years beginning after 2022.
Additionally, effective for taxable years beginning after 2022, the current-law 3.8 percent net investment income tax rate would increase to 5 percent for taxpayers earning over $400,000.
Finally, with regard to current law’s additional 0.9 percent Medicare tax applicable to employment earnings over $200,000 for single filers and $250,000 for married filers, the Budget proposes to impose an additional 1.2 percent tax on employment earnings over $400,000. This proposal would be effective for taxable years beginning after 2022 and raise the marginal Medicare tax rate to 5 percent.
The budget proposes to limit the deferral of taxable gain from a like-kind exchange to $500,000 for single taxpayers and $1 million for married taxpayers. The proposal would be effective for exchanges completed in taxable years beginning after 2023.
Limitation on Non-Corporate Business Losses
The budget proposes to make permanent a provision limiting excess business losses that was otherwise set to expire at the end of 2028. Under current law, a non-corporate taxpayer is considered to have an excess business loss if their total business deductions exceed business income plus $289,000 for single filers and $578,000 for joint filers. Additionally, while current law allows excess businesses losses to be treated as a net operating loss, the proposal would modify this treatment and treat losses carried forward to future years as current-year losses.
The budget proposes to impose ordinary income taxes on recaptured depreciation (as opposed to the current-law 25 percent rate) for the recapture of depreciation deductions taken in taxable years beginning after December 31, 2023. The proposal would apply to taxpayers with incomes of $400,000 or more.
As described in the Treasury Green Book, “the proposal would reduce the ability of related parties to use a partnership to shift partnership basis among themselves for the purpose of creating advantageous tax results with no meaningful economic consequences. In the case of a distribution of partnership property that results in a step-up of the basis of the partnership’s non-distributed property, the proposal would apply a matching rule that would prohibit any partner in the distributing partnership that is related to the distributee-partner from benefitting from the partnership’s basis step-up until the distributee-partner disposes of the distributed property in a fully taxable transaction.”