Beware of Budget Gimmickry in Revived Build Back Better Act
According to news reports, President Biden and his aides discussed over the holidays how to revive the Build Back Better Act with Senate Democrats. Before any votes are scheduled, it is important for American taxpayers to be made aware of the huge costs they would have to bear if the little-noticed numerous housing proposals in the Act become law.
Currently, the Act includes a proposal to spend more than $160 billion to expand existing low-income housing programs and create major new ones. To keep their apparent cost low, many provisions increase government spending for only a few years. If the proposed reforms are made permanent as intended by proponents, their cost over the next ten years would be much greater, and they would have substantial additional cost each year thereafter.
The proposed Neighborhood Homes Investment Act (NHIA) is a good example. The program would provide tax credits to selected builders and renovators of owner-occupied houses for households with incomes less than 140% of the local median income. About 75% of all households would be eligible to live in these houses. The program would be administered by state agencies that would decide who gets the tax credits and enforce the program’s restrictions.
In the House’s version of Build Back Better, NHIA would begin in 2022 and end in 2025. Each state would be allowed to allocate tax credits equal to $3 times its population during each of its first three years. So, the program’s cost would average about $1 billion a year for these years. In the last year, states would be allowed to allocate tax credits equal to $6 times their populations, about $2 billion in total. This allows proponents to claim that creation of the program would cost less than $6 billion.
Obviously, it makes no sense to create a non-emergency program that lasts for four years. The program’s first year would be devoted largely to hiring staff, writing regulations, and creating mechanisms for accepting and processing applications. A short-lived, non-emergency program does not justify these upfront costs.
If the program were continued at the last year’s rate ($6 per capita) with annual increases for inflation (which happens with tax credits for low-income rental projects), the true cost over ten years would exceed $18 billion — more than three times its stated cost. Each year thereafter, the program would cost about $2.5 billion in 2031 dollars. An expensive permanent program would have been created without careful deliberations.
The cost of the proposals to reform the existing Low-Income Housing Tax Credit program for rental projects are understated in Build Back Better to an even greater extent. The program is expensive and complex. Each year the largest component allows each state to award federal tax credits equal to a fixed amount, times its population. The state agencies award these credits to selected developers via a competitive process. In 2021, the per-capita amount was $28.10, and states awarded about $10 billion in tax credits through this mechanism.
The per-capita amount is usually increased each year by the rate of inflation. However, in 2018 Congress temporarily increased it well beyond inflation through 2021. Under current law, the per-capita allocation will fall from $28.10 in 2021 to $25 in 2022 and increase at the rate of inflation thereafter.
Build Back Better calls for much larger per-capita allocations for 2022 through 2024. In 2022, the Act specifies a per-capita allocation of $31.40 rather than $25 — an increase of $6.40. Since the U.S. population exceeds 330 million, passage of the Act would increase tax credits awarded in 2022 by about $2.1 billion compared with current law. In 2023 and 2024, the proposed increases are much greater and result in an increased cost of about $7.8 billion. Therefore, the cost of this provision would be about $10 billion.
This is five times greater than the Joint Committee on Taxation’s official estimate. Their calculations fail to account for the fact that, under current law, the per-capita allocation will be much lower in 2022 than 2021, and the inflation adjustment will be applied to this lower base thereafter. They also count only the tax credits that will be claimed in the 10-year window 2022 through 2031. Some of the credits awarded in 2022 through 2024 will be claimed after 2031. Future congresses cannot renege on these commitments.
If the “temporary” per-capita amounts are extended beyond 2024 starting with the new higher base and the usual inflation adjustment, the cost of the Act’s increase in state allocations over ten years would exceed $45 billion — more than twenty times the official estimate, and they would cost taxpayers more than $5.5 billion each year thereafter in 2031 dollars.
Edgar O. Olsen is an adjunct fellow at the American Enterprise Institute, and a professor emeritus of economics at the University of Virginia.
