FY 2024 Budget

Budget and tax issues dominated federal government news of interest to local governments in March. Most notably, with the fiscal year nearly half complete, Congress completed work on FY 2024 appropriations bills. At the same time, President Biden released his proposed FY 2025 budget, setting off the FY 2025 appropriations process. The end product looks much like the FY 2023 budget. Ultimately, Congress chose to abide by the budget spending cap for FY 2024 that was part of the debt limit agreement enacted in early 2023.

Nevertheless, tight spending caps impacted several programs of interest to local governments, particularly at the Department of Homeland Security. Several local officials expressed particular concern about the final funding level for a FEMA program that provides emergency shelter and services to migrants. The bill cuts the program from $800 million to $650 million rather than increasing it to $1.4 billion as requested by local government organizations. The package also leaves out another local government priority: funding to continue the Affordable Connectivity Program, which subsidizes broadband service for low-income households and is set to run out of money next month.

The FY 2024 endgame came into focus in early March, when President Biden and the congressional leadership agreed to complete work on FY 2024 spending via two six-bill “minibus” appropriations bills with a top line spending total of $1.66 trillion.

The first “minibus” bill includes six of the twelve annual appropriations bills:

• Agriculture/Rural Development/FDA.
• Commerce/Justice/Science.
• Energy and Water Development.
• Interior/EPA.
• Military Construction/VA.
• Transportation/HUD.

Some local government highlights of that first bill include (comparison to FY 2023):

• $3.3 billion for CDBG Formula Grants (same).
• $1.25 billion for HOME (-$250m).
• $505 million for HOPWA (+$6m).
• $3.544 billion for Homeless Continuum of Care (+$390m).
• $32.386 billion for Tenant-Based Section 8 (+$2.133b).
• $16 billion for Project-Based Section 8 (+$2b).
• $75 million for Choice Neighborhoods (-$275m).
• $400 million for Economic Development Administration Grants (-$30m).
• $98 million for Brownfields (-$2m).
• $345 million for RAISE Grants (-$455m), which is in addition to the $1.5 billion provided by IIJA/BIL.
• $2.205 billion for Transit Capital Investment Grants (-$5m), which is in addition to the $1.6 billion provided by IIJA/BIL.

While each set of budget “minibus” bills considered by Congress contained six measures, this second group represents almost 70% all FY 2024 spending, as it includes agency behemoths such as the Departments of Defense and Health and Human Services. The six bills in the plan approved by the House and heading to the Senate are:

• Labor-HHS-Education.
• Defense.
• Financial Services (Treasury, SBA).
• Homeland Security.
• Foreign Operation (State).
• Legislative Branch (Congress’ budget).

Some highlights of the second bill’s funding level for programs of interest to local governments include (comparison to FY 2023 level):

• $324m for Firefighter Assistance Grants (-$36m).
• $324m for SAFER Firefighter Hiring Grants (-$36m).
• $535m for the Urban Area Security Initiative (-$80m).
• $12.272b for Head Start (+$275m).
• $1.33b for 21st Century Learning Centers (same).

The House approved the second minibus and when it reconvenes, it will work on other pending bills, such as FAA reauthorizations, the Farm Bill, and job training reauthorization.

FY 2025 Budget

President Biden this week sent his proposed FY 2025 Budget to Congress. The conveyance of the president’s budget proposal traditionally kicks off the annual budget process. However, this year Congress spent much of March focused on FY 2024 appropriations bills, meaning that the start of the FY 2025 appropriations process of Capitol Hill slipped and will begin in earnest when Congress returns from its two-week holiday recess.

Most programs of interest to local governments fall under the broad category of non-Defense discretionary spending, for which the president is proposing $785 billion, a 2% increase from the FY 2024 level, and $895 billion for Defense, a 1% increase (at least in theory, since FY 2024 spending is not yet finalized). That top line number for non-Defense discretionary is in line with the debt limit deal he reached with the congressional leadership last year. It is important to note that the president’s budget, like most budgets from presidents of both parties, would reduce funding for things such as Army Corps of Engineers civil works projects and eliminate funding for congressional earmarks, and Congress is almost certain to restore that type of funding in any final spending bills. In addition, Congress will want more than a 1% increase for Defense.

In other words, those factors mean another tight year for many programs of interest to local governments. That is most evident in some of the president’s proposed funding levels at the Department of Housing and Urban Development. For example, the president is proposing $2.9 billion for CDBG Formula Grants, a 12% cut from the FY 2024 level to a program that has seen stagnant funding for many years. Similarly, the president proposed $1.25 billion for HOME, the same as FY 2024, but below recent funding of $1.5 billion and well below peak funding of $2 billion for the program, which helps local governments preserve and expand affordable housing stock.

Other HUD highlights (with comparison to the FY 2024 level) include:

• $32.756b for Tenant-Based Section 8 (+$370m).
• $16.686b for Project-Based Section 8 (+$676m).
• $3.312b for Public Housing (-$98m).
• $140m for Choice Neighborhoods (+$65m).
• $4.06b for Homeless Assistance Grants (+$9m).

Some other highlights at other agencies (with comparison to the FY 2024 level) include:

• $7.7b for WIC (+$700m).
• $437m for the Economic Development Administration (+$132m).
• $531m for UASI (FY24 TBD).
• $385m for Firefighter Assistance Grants (FY24 TBD).
• $385m for SAFER Firefighter Hiring Grants (FY24 TBD).
• $400m for RAISE Grants (in addition to IIJA advance appropriation of $1.5b) (+$65m).
• $400m for INFRA Grants (in addition to IIJA advance appropriations of $1b) (+$400m).

Finance

Treasury issues final rule for elective pay clean energy tax credits. The Internal Revenue Service (IRS) issued final regulations for the set of Inflation Reduction Act clean energy tax credits that can be claimed by entities without tax liability, including local governments and nonprofit organizations.

The Inflation Reduction Act created an array of clean energy tax incentives and included language allowing tax exempt entities to claim 13 of those credits. The regulations that the IRS issued this week lay out the details for receiving the tax incentives as a direct payment from the Treasury or transferring them to another entity. In addition, the IRS previously issued guidance that outlines the registration steps that a tax-exempt entity must take ahead of claiming one of the tax incentives.

The 13 tax incentives that the Inflation Reduction Act makes available to tax exempt entities are the (section of the tax code) (applicable IRS form):

1. Production Credit for Electricity from Renewables (pre-2025).
2. Clean Electricity Production Credit (post-2025).
3. Investment Credit for Renewable Energy Property (pre-2025).
4. Clean Electricity Investment Credit (post-2025).
5. Low-Income Communities Bonus Credit.
6. Carbon Dioxide Sequestration Credit.
7. Zero-Emission Nuclear Power Production.
8. Advanced Energy Project Credit.
9. Advanced Manufacturing Production Credit.
10. Qualified Clean Commercial Vehicles Credit.
11. Alternative Fuel Refueling Property Credit.
12. Clean Hydrogen Production Credit.
13. Clean Fuel Production Credit.

One of the most notable features of the final rule is that it addresses a major concern raised by local government organizations about a provision in the law and the proposed regulation that threatened the ability of some local governments to claim the tax credit due to a reference to “taxable year” and how it might conflict with some local government fiscal years, especially for projects placed in service in the first six months of 2023 by a local government with a July1-June 30 fiscal year. The final rule addresses this concern:

“These final regulations delete the reference to section 441 and clarify that, for purposes of section 6417, an applicable entity that is not required to file a Federal income tax return pursuant to section 6011 or Federal return pursuant to section 6033(a) (such as a State; the District of Columbia; an Indian tribal government; any U.S. territory; a political subdivision of a State, the District of Columbia, or a U.S. territory, or a subdivision of an Indian tribal government; certain agencies or instrumentalities of a State, the District of Columbia, an Indian tribal government, or a U.S. territory; or a taxpayer excluded from filing pursuant to section 6033(a)(3)), but is filing solely to make an elective payment election, may choose whether to file its first Form 990-T (and thus adopt a taxable year for purposes of section 6417) based upon a calendar or fiscal year, provided that such entity maintains adequate book and records, including a reconciliation of any difference between its regular books of account and its chosen taxable year, to support making an elective payment election on the basis of its chosen taxable year. This should allow an applicable entity that is not required to file a Federal income tax return pursuant to section 6011 or Federal return pursuant to section 6033, but has placed in service an applicable credit property in 2023, to file Form 990-T based on a calendar year and make an elective payment election with respect to the applicable credit property regardless of when the property was placed in service during 2023.”

It is important to note that for most of the tax credits eligible for elective pay, claimants must meet domestic content, prevailing wage, and apprenticeship requirements to claim the full tax credit. The regulations issued this week only cover the details of the elective pay process. The IRS has issued separate regulations covering those requirements, which apply to all claimants of the tax credits. Those regulations are covered here and here.

• The IRS press release. 
• The final regulations. 
• The IRS elective pay website.

Economic Development

The Senate Environment and Public Works Committee unanimously approved legislation (S 3891) to reauthorize the Economic Development Agency (EDA). It would be the first reauthorization of EDA in two decades. The bill would also reauthorize the various federal regional economic development commissions, such as the Delta Regional Authority, the Southeast Crescent Regional Commission, and the Northern Great Plains Regional Authority, and create two new commissions to serve the Mid-Atlantic and Southern New England.

At the broadest level, the bill would authorize $170 million for public works grants in FY 2025, increasing incrementally to $270 million in FY 2029. For comparison, the recently enacted FY 2024 appropriations bill provides $100 million for public works grants. The bill would also set authorization levels for other EDA grants and technical assistance programs. It would also authorize $40 million per year through FY 2029 for each of the regional economic development commissions.

The bill would also make an array of changes to EDA programs, such as:

• Adding definitions of ‘blue economy’ (sustainable marine resources) and ‘travel and tourism’ to the EDA statute.
• Requiring increased coordination between EDA and the regional commissions.
• Adding several factors to review of public works grants, such as economic diversification, resilience from extreme weather events, support for outdoor recreation, access to broadband, promoting the blue economy, and promoting travel and tourism.
• Allowing regional commission funds to count toward the non-federal share of an EDA grant.
• Adding several criteria for determining economic distress.
• Updating economic development strategies.
• Adding a grant program to address supply chain issues.

The next step for the bill is the Senate floor.

• The bill text approved by the committee.
• The committee summary.
• The committee section-by-section.