Major tax legislation is an opportunity for Congress to incentivize and unleash investment in housing and development through the tax code—are they taking the action the country so critically needs?
The Republican-controlled Congress passed a sweeping budget resolution in April that allowed them to begin drafting the changes to the tax code that will shape the future of development and impact smart growth efforts nationwide. The tax code has traditionally been a vehicle for specific community development tools such as the Low-Income Housing Tax Credit, the New Markets Tax Credit, and the Opportunity Zones incentive. These tax incentives pair with the direct funding provided to communities through programs like the Community Development Block Grant program and brownfields grants to support critical housing and redevelopment projects in communities across the country. Does the legislation that this Congress is advancing foster healthy, prosperous, and resilient communities? Not quite.
House Republicans largely opted for a tax bill that provided tax relief directly to companies and individuals rather than one that prioritizes supporting community development through the tax code. This approach and the budget constraints imposed by fiscal conservatives forged a bill that has a few strong provisions but is also missing key opportunities to invest in the next decade of development. For example, the bill expands the Low-Income Housing Tax Credit, used to support the construction of affordable rental units, but failed to include the Neighborhood Homes Investment Act, which would help support the construction and preservation of affordable owner-occupied housing.
Rather than a clear mandate for smart growth, the current tax bill instead offers mixed signals:
Green light: The most effective tax credit to build affordable housing made the cut. Key priorities related to expanding the Low-Income Housing Tax Credit (LIHTC), a tax credit used to build and rehabilitate affordable housing units, are in the bill draft. These include:
- Increasing the amount of credits available by extending a provision that provided an increase in the overall amount of credits for four years.
- Increasing the number of homes that can be financed through the program by reducing the portion of a project that must be bond-financed to qualify for the credit.
- Providing a boosted incentive for rural and Native American areas by designating them as “Difficult Development Areas.”
Leading tax credit advocates with the ACTION Campaign say that these provisions could result in the production of over half a million additional affordable homes.
Yellow light: It’s a mixed bag on development incentives targeted to underserved communities. Overall, Congress chose to protect most existing community development financing tools, with the exception of the New Markets Tax Credit, but did not take a proactive approach to expanding the toolbox.
- The bill doubles down on the Trump-era policy of Opportunity Zones, a tax incentive for certain investments in specific distressed census tracts, by extending the period of time the incentive can be utilized into the future, allowing the universe of census tracts designated as Opportunity Zones to be refreshed through a redesignation process, and adding reporting requirements.
- Tax exemptions for municipal bonds were not eliminated, as some feared they might be. Tax-exempt bonds are a critical tool communities use to finance essential infrastructure, and removing the tax exemption would undercut community development efforts nationwide.
- On the other hand, an extension of the New Markets Tax Credit and language creating the new homebuilding incentive proposed by the Neighborhood Homes Investment Act are not included in the bill.
Red light: No focus on supporting downtowns, main streets, or growth in areas well-connected to essential destinations. The draft is missing several tax provisions that would incentivize, either implicitly or explicitly, infill development or redevelopment in areas close to services and amenities.
- The bill does not include the brownfields tax deduction, which would allow taxpayers to fully deduct the cleanup costs of contaminated property in the year the costs were incurred, thereby making the contaminated sites far more competitive to develop.
- The bill also does not include a LOCUS-proposed provision that would provide a targeted incentive for Opportunity Zone projects located in downtowns in urban and suburban areas or rural mainstreets.
- Nor was the tax incentive for converting existing vacant and underutilized commercial properties into new housing proposed in the Revitalizing Downtowns and Main Streets Act of 2025 included.
This failure to encourage the development of housing and the creation of jobs in close proximity to existing resources is a missed chance to improve access to opportunity for more Americans.
What’s shaping the rest of the process, and where do things go now?
In a bill so crowded, the tax provisions are competing directly with community development-focused incentives. For example, preserving basic federal income tax rates as they are, rather than allowing them to expire and rise, is a significant piece of the cost. Elsewhere, provisions that provide direct tax relief to seniors, families with children, and businesses run up the price tag.
While the initial draft included some smart growth tax provisions, the high cost of preserving the basic income tax rates, paired with the overall spending constraints imposed by the fiscal conservatives within the Republican caucus, could threaten the inclusion of community development-focused provisions and other smart growth priorities.
The current text isn’t the final product—the Senate will almost certainly put their stamp on the bill, and the House has not cleared all of their own hurdles. In addition, House Ways and Means Chair Jason Smith recently said that he’d like to negotiate a bipartisan tax bill later this year to include provisions with bipartisan support that didn’t have the support within the Republican caucus to be included in the current partisan tax package. The likelihood of that second package coming together remains unclear, upping the stakes for advocacy on the current bill.
Take action
As the legislation continues to move forward, it will be critical for stakeholders to advocate for smart growth-aligned tax programs directly to their members, both to protect those already included and to advocate for the addition of programs left on the cutting room floor. Take action in support of the brownfields deduction by clicking here or find contact information for your Members of Congress and reach out to them to advocate directly for smart growth provisions in the tax bill by using this link.