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2008 Tax Legislation Outlook
Published: February 05, 2008
By Jennifer Bonar Gray, NMHC/NAA Vice President of Tax
The outlook for enactment of any major tax legislation in 2008 must be viewed through two prisms—the federal budget deficit and the looming November elections. The budgetary reality Congress faces combined with “pay-as-you-go” (“PAYGO”) rules, requiring tax increases or spending cuts to pay for new tax policy, make it difficult for Congress to pass any major legislation. The other major constraint on significant tax legislation is election year politics, which not only shortens the legislative calendar so lawmakers can focus on their campaigns, but also gives Congressional leaders an incentive to wait for a new President before beginning negotiations on thorny issues.
This article examines the multifamily industry’s most pressing tax issues and how they are expected to fare in the new Congressional session that just began last month.
Economic Stimulus Package
Although looming elections traditionally make it difficult to enact major legislation, this year’s election year considerations actually are largely responsible for the item that is the present focus of the Washington tax community—the proposed economic stimulus package. This package is expected to include both tax and spending components as well as elements of reform for the FHA and Government Sponsored Enterprises (GSE) to help address mortgage finance problems.
A bipartisan deal was announced on January 24 with much fanfare by the Administration and House Democratic and Republican leadership; however, it is still unclear what the final tax portion of the package will look like. At the end of the day, it is all but certain that a bill will be enacted in the coming weeks as the Democratically controlled Congress is anxious to rid itself of the “do-nothing” label and the Bush Administration is eager to avoid being blamed for a bad economy on the eve of an election.
The biggest obstacle to the package—the need to come up with offsetting spending cuts or tax increases—has already been removed, as both parties have agreed to waive the PAYGO rules.
House leaders bypassed the normal committee process and the House overwhelmingly passed the $146 billion bill (H.R. 5140) on January 29. The centerpiece of the House-passed package is $100 billion in tax rebates for individuals. Generally, families earning above $3,000 and below $75,000 ($150,000 for married couples) will receive up to $600 each ($1,200 per married couple) plus $300 per child.
The rest of the cuts are designed to spur business investment. They include 50 percent bonus first-year depreciation on certain business assets (with depreciable lives of 20 years or less) purchased in 2008 (IRC §168), and up to $250,000 in immediate expensing of business assets purchased in 2008 by certain small businesses (IRC §179).
The path for the legislation in the Senate is less clear. Not content to merely accept the stimulus bill passed by the House, the Senate Finance Committee marked up its own $157 billion bill on January 30.
The Senate bill differs from the House version in a number of significant ways. First, it reduces the individual tax rebate to $500 per person ($1,000 per married couple), plus $300 for every child for families earning above $3,000 and below $150,000 in adjusted gross income ($300,000 for married couples).
Unlike the House bill, those deriving income from Social Security and veteran’s disability benefits will be eligible to receive the rebate, provided they meet the $3,000 income threshold amount.
To spur business investment, the bill contains three provisions, but requires firms to choose just one of the three. They are: (1) up to $250,000 in Section 179 expensing for certain small businesses; (2) Section 168 bonus depreciation of 25 percent for each of the first and second years after the purchase of certain business assets with depreciable lives of 20 years or less (including qualified leasehold improvement property); and (3) an extension of the net operating loss (NOL) carryback period from two years to five years for NOLs arising from tax years 2006, 2007 and/or 2008.
The Senate bill also contains several NMHC/NAA-supported provisions. Specifically, it expands the volume cap for Section 141 private activity bonds to provide up to $10 billion in additional mortgage revenue and multifamily housing bonds, and it extends for one year (through 2009) the Section 179D deduction for energy-efficient commercial buildings and the Section 48 business credit for solar and fuel cell investment.
While it is all but certain that a stimulus bill will be enacted, how lawmakers get there remains unclear. Generally, Senate Democrats would like to see the Senate Finance Committee package (with the addition of $10 billion in new spending for extended unemployment benefits plus an additional $1 billion for low-income heating assistance) enacted. This would set up the need for further negotiation with the House, however, to resolve differences between the two bills.
Most Senate Republicans, meanwhile, are urging the Senate to accept the House-passed bill without amendment. It is unclear at press time whether supporters of the Senate Finance Committee package have the votes necessary to change the House-passed bill.
Energy-Efficient Tax Incentives and Tax Extenders
Congress failed to act on several pieces of tax legislation before adjourning last December largely because lawmakers could not agree on how to pay for the tax cuts included in them. Some of these tax packages are expected to be reconsidered in 2008.
At the top of this list is the “extenders package,” which would extend a number of temporary tax provisions that expired on December 31, 2007. This includes an NMHC/NAA-supported provision allowing the immediate expensing of environmental cleanup costs. The extenders package is expected to pass in 2008 (possibly as early as the end of the first quarter), and it is very likely to extend the provisions retroactively. This retroactive extension is a high priority for the apartment industry, particularly as it relates to the environmental cleanup cost expensing provision that expired at the end of 2007.
Congress may also revisit an energy tax package that was dropped from the energy bill (P.L. 110-140), enacted last December after failing to overcome both a Presidential veto threat and repeated Republican filibusters in the Senate. Once again, the primary obstacle to enactment was how to pay for the incentives.
The $22 billion tax package contained several provisions of interest to the real estate industry, including a five-year extension of the temporary $1.80 per square foot deduction for energy-efficient commercial buildings that is currently scheduled to expire in 2008 The package would have also extended Section 48 business credits for solar and fuel cell investment (also scheduled to expire in 2008) for eight years and created a new 10 percent investment tax credit for properties that install a combined heat and power system. (As noted above, the Senate Finance Committee version of the stimulus package extends the commercial building deduction and the solar/fuel cell credit through 2009).
While both the extenders package and the energy tax provisions have strong bipartisan support, whether they are ultimately enacted will depend on whether the Administration and Congressional leaders can overcome the stalemate over the PAYGO rules.
Carried Interest
The tax treatment of carried interest was not on anyone’s radar 12 months ago, but it quickly became the real estate industry’s highest priority issue last spring, when the real estate industry found itself a collateral target of Congressional efforts to rein in the high-flying hedge fund managers and find a way to pay for a $50.6 billion temporary fix for the AMT. Congress’s proposed solution was to increase taxes on carried interest by up to 133 percent—a proposal that would have been crippling to real estate partnerships.
A coordinated effort by the real estate industry convinced lawmakers to strip the proposal from the final AMT bill signed into law at the end of 2007. Although NMHC/NAA and other real estate groups were successful in raising concerns among lawmakers about the impact of the provision on the real estate industry and the economy generally, the carried interest issue is very likely to continue to be examined in 2008 and subsequent years as the search for tax increases to fulfill PAYGO requirements continues.
Estate Tax
Estate tax reform is another issue expected to receive attention in 2008 and significantly more in 2009. In 2001, Congress passed a law that reduces the federal estate tax each year from 2002 to 2009, and then fully repeals it for one year in 2010. But despite several attempts over the last few years, proponents of the measure have been unable to secure the 60 Senate votes required to make the repeal permanent. As a result, after December 31, 2010, the law reverts back to the higher rates and smaller exclusions that were in place in 2001.
Estate tax opponents want to ensure that the law does not revert back to higher estate taxes in 2011. On the other side, estate tax supporters are fighting against a complete repeal of the law in 2010 out of concern that taxpayers will get used to the repeal and will increase pressure on Congress to continue the repeal in perpetuity. A compromise on the estate tax issue is highly likely to develop in the next couple years.
President Bush is eager to strike a deal on the issue before his term ends next January, but Congressional opponents of the estate tax repeal may be more inclined to wait until a new administration takes power in hopes of negotiating with a future president more sympathetic to their views. The issue is expected to get considerable attention in 2008, particularly in the Senate Finance Committee where Chairman Max Baucus (D-MT) has already announced his intention to hold a hearing on estate taxes this spring. Nonetheless, the chances of legislation being enacted this year are thought to be somewhat slim.
Even though final action on estate taxes is not expected this year, NMHC/NAA will be actively engaged in this issue as the debate in 2008 will likely guide any eventual compromise enacted in 2009 or 2010. The real estate industry’s primary concern is that any compromise bill retains “stepped-up” basis.
The 2001 law not only repealed the estate tax in 2010, but it also largely repealed stepped-up basis for that year, which means that estates containing substantial commercial property could find themselves avoiding the estate tax only to have heirs owe substantial capital gains taxes. NMHC/NAA will continue to advocate for estate tax reform that retains stepped-up basis and includes larger exemptions for certain estates and lower rates (similar to how the law will look in 2009).
This Tax Update was prepared by Jennifer Bonar Gray, NMHC/NAA vice president of tax. For more information, contact her at 202-974-2362 or jgray@nmhc.org.
