Changes Made to Democrats’ Flawed Inflation Reduction Act; Work Continues to Improve Bill

As the Senate rushes forward to pass the Inflation Reduction Act of 2022, NAHB remains opposed to the bill even as we were able to work with Sen. Kyrsten Sinema (D-Ariz.) to obtain key changes as it related to carried interest and how companies can deduct depreciated assets from taxes.

During the week of Aug. 1, NAHB Chairman Jerry Konter issued a strong rebuke of the bill because it contained several changes to the taxation of real estate and new building and energy code requirements that will raise the cost of housing. Konter urged Senate Democrats to rework the bill by eliminating these onerous provisions, and NAHB also sent a letter to Senate leaders that went into more detail expressing our opposition to the bill.

And although the bill does include positive provisions for housing, NAHB believes that overall the bad outweighs the good, despite the 11^th hour changes to the legislation that NAHB helped to push through.

The Inflation Reduction Act is expected to pass both chambers of Congress before mid-August because Senate Democrats are determined to fast-track the legislation through what is known as “reconciliation.” This is an expedited process that allows the bill to pass the Senate with just 50 votes and without any Republican support.

New Codes Requirements

On the codes front, the legislation contains $1 billion in grants for paying state and local governments to adopt more stringent energy code regulations. The practical effect will be to raise housing costs even further while doing very little to provide meaningful savings for residential homes and apartments.

Two-thirds of the funds, or $670 million, will be made available for the adoption of energy regulations for residential and commercial buildings that meet the zero energy provisions in the 2021 edition of the International Energy Conservation Code (IECC). These zero-energy targets are not appropriate for most jurisdictions and not cost-effective for consumers.

NAHB continues to push for a better strategy — where the Department of Energy takes the lead to help states advance the codes in a manner that best fits the needs of state and local governments.

A Victory on Carried Interest

In the tax arena, NAHB strongly supported the efforts of Sen. Sinema to kill an onerous provision on carried interest that would have affected existing real estate partnership agreements and the treatment of Section 1231 gains at a time when housing has entered an industry recession.

However, the bill includes structural changes to the Section 45L new energy efficient home tax credit, which provides builders a $2,000 tax credit on homes by meeting specific energy savings on homes built above the baseline IECC, that would effectively render the tax credit null and void for most builders.

Changing the rules to make ENERGY STAR the sole means to qualify for the 45L tax credit is counterproductive because it is a niche market that will never be widely adopted — less than 10% of single-family and multifamily units were certified in 2020.

On the positive side, the legislation includes long-term extensions for many other existing energy tax incentives, and $4.3 billion for the HOMES Rebate Program, an energy-efficient retrofit program.

Further, NAHB fought successfully to defeat a measure that would have extended the 3.8% Net Investment Income Tax (NIIT) to active investors, including NAHB members. The NIIT applies to capital gains and rental income, among other investment streams, and would have directly increased the cost of housing.