Tax Credit Programs Lay the Foundation for Biden Infrastructure Initiative
President Biden has introduced a $2 trillion infrastructure plan that proposes a wide range of tax credits to incentivize investment in affordable housing, community development, and clean energy.
Recently, President Biden unveiled a $2 trillion proposal, titled "The American Jobs Plan," to rebuild America's infrastructure and revitalize the economy. The plan broadly describes "infrastructure" and proposes the creation and expansion of a wide range of tax credits to incentivize investment in affordable housing, community development, and clean energy. The proposal leverages the public/private frameworks established by existing tax credit programs (i.e., those that have already successfully increased investment in affordable housing, low-income communities, historic rehabilitations, and renewable energy) to spur major new investment in infrastructure. This Alert summarizes these tax credit proposals.
Affordable Housing Proposals
President Biden's infrastructure plan calls on Congress to pass the Neighborhood Homes Investment Act ("NHIA"). Originally proposed in 2016, the NHIA is based on the Low-Income Housing Tax Credit ("Housing Credit") and offers $20 billion worth of tax credits to developers and investors over the next five years, with a goal of constructing approximately 500,000 homes. Where the Housing Credit supports affordable rental housing, the NHIA credits would allow developers to cover the gap between home development costs and sales prices in order to make home ownership viable for families in lower-income communities. Specifically, homeowners with incomes up to 140% of the area median income would be eligible to purchase the homes constructed under the NHIA, and home sale prices would be limited to four times the area median family income.
The NHIA credit functions in a similar way to the Housing Credit. As states allocate tax credits on a competitive basis, project developers raise capital from investors and use it to finance home construction and substantial rehabilitation, and investors claim tax credits after homes are completed and owner-occupied. Similar to the New Markets Tax Credit program, projects must be located in certain economically distressed census tracts to qualify for the credit.
The plan also proposes the investment of $213 billion in additional targeted tax credits, formula funding, grants, and project-based rental assistance to construct or preserve affordable, accessible, and energy-efficient housing units.
In addition, on April 15, the Affordable Housing Credit Improvement Act (AHCIA) of 2021 (S. 1136/H.R. 2573) was introduced. This bill would address the ongoing shortage of affordable housing by expanding and improving the Housing Credit, an important tool for encouraging private investment in the production and preservation of affordable rental housing.
Modernization of Electric Transmission System
The plan also focuses on modernization of the electric transmission system through investments in the power grid. The plan calls for the creation of a targeted investment tax credit that incentivizes the construction of high-voltage capacity power lines. While details of Biden's proposed credit are limited, similar proposals in the past have been modeled on the investment tax credit to defray the costs of constructing the transmission lines.
Clean Energy Proposals
President Biden's plan prioritizes investments in clean and sustainable energy infrastructure. The plan proposes a 10-year extension and phase down of an expanded investment tax credit and production tax credit for clean energy generation and storage. Investment in green infrastructure will be targeted toward distressed communities: President Biden plans to pair an investment in 15 decarbonized hydrogen projects in distressed communities with a new production tax credit in order to spur investments that promote decarbonization. The plan also extends and expands home and commercial energy-efficiency tax credits.
The plan further incentivizes clean energy practices by expanding the Section 45Q tax credit, which provides a tax credit for carbon sequestration.
What's Next
President Biden's infrastructure plan proposes an increase in the corporate tax rate to 28% to fund the costs of the plan. For this among other reasons, Republican lawmakers have balked at President Biden's plan, and countered with a much smaller $568 billion infrastructure package. Any increase in tax rates would likely spur more interest in tax credit investments, which have already seen increased attention as ESG-related investment continues to grow.
A formal bill has not yet been introduced in the Senate, and crucial negotiations regarding the size and scope of the ultimate infrastructure package are ongoing. President Biden and House Speaker Nancy Pelosi have voiced their desire to pass the package with bipartisan support, but also kept the door open to passing the bill on party lines. President Biden has signaled a willingness to break the package up into smaller bills that may garner more bipartisan support. This approach may find some success, as tax credit programs tend to receive wide Congressional support. In fact, several bills expanding or enhancing tax credit programs have been, or are expected to be, introduced in the current session with bipartisan co-sponsorship, including the New Markets Tax Credit Extension Act of 2021 and the Historic Tax Credit Growth and Opportunity Act of 2021. Given this momentum, it seems likely that an expansion of tax credit investment programs will pass in some form to provide additional sources of capital to a variety of infrastructure-related projects.
