Tax Policy Fights Will Continue Beyond 2012 Elections

Winter 2011

As 2011 comes to a close, Congress will most likely be deciding what to do with deficit reduction proposals, if any, arising from the so-called “Supercommittee” that was created in the wake of the debt-ceiling debate that consumed Washington in July.

Tax policy is front and center in these deliberations, and many of the decisions reached could have profound ef­fects on the commercial real estate industry and NAIOP’s agenda. However, regardless of what Congress may decide in December 2011, the impact is likely to be short-lived. Fights over the broad outlines of our tax system will con­tinue through 2012 and ultimately be resolved only after the nation decides who the next President should be.

The Supercommittee, formally known as the Joint Select Committee on Deficit Reduction, was created by the debt limit deal struck by President Obama and Congress and signed into law this August after heated negotiations. The legislation established procedures for future increases in the debt ceiling, contained approximately $917 billion in deficit reduction from 2012-2021, and created the tempo­rary joint congressional “supercommittee” to recommend additional deficit reduction measures. Twelve members serve on the Supercommittee, three from each party from the Senate and the House of Representatives. It has as its goal finding an additional $1.5 trillion in deficit reduction from 2012-2021, and presenting this package of mea­sures to Congress in December, with a vote occurring no later than December 23.

The deficit reduction panel had been dubbed a “supercom­mittee” because its recommendations would be given a clean up or down vote. They cannot be amended, and are protected from a Senate filibuster that would require 60 votes (instead of a simple majority) for the package to pass. If, however, the Supercommittee cannot agree, or if its recommendations fail to pass Congress or are vetoed by the President, then an automatic reduction, or sequestration, of $1.2 trillion over 10 years will occur across most of the federal budget, to take effect in January of 2013.

President Obama’s proposed $447 billion jobs bill com­plicated the task of the Supercommittee by calling on the panel to pay for the bill through revenue offsets he has pro­posed. One was a tax increase on “carried interest” com­pensation paid by partnerships, which NAIOP has strongly opposed and has been repeatedly rejected by the Senate. Under this proposal, a carried interest – also known as a “promote” or “promoted interest” in the real estate indus­try, would be treated as ordinary income instead of capital gains, resulting in an increase from a rate of 15 percent to nearly 35 percent in most cases. The proposed car­ried interest tax increase is not a major source of revenue, projected to raise only $18 billion of the $447 billion cost over the next 10 years, but is put forth as populist measure aimed at “Wall Street hedge fund managers.”

Unfortunately, despite the rhetoric, the reality is that the major impact of the change would not be felt by Wall Street hedge funds but primarily by the nation’s real estate industry and venture capital firms. Such fundamental changes to partnership tax law should be ac­complished in the context of compre­hensive tax reform, where they can be balanced and weighed with other permanent changes in the code that would promote economic growth. The current proposal would in essence be a permanent tax increase on real estate to pay for a temporary spend­ing measure. Resolution of NAIOP’s other tax priorities, including 15-year leasehold improvement deprecia­tion and expensing for brownfields remediation costs, will come after action on the Supercommittee’s recommendations in December. There may not be enough time for Congress to pass a “tax extenders” bill in 2011 to continue these expiring provisions, meaning that a bill in 2012 would need to be retroactive.

Regardless of what Congress decides to do with the deficit reduction mea­sures developed by the Supercommit­tee in the short term, the debate over the future direction of tax policy will run through the 2012 election. This is because the Bush tax cuts expire in January 2013 and will be an issue in the presidential campaign. If the Su­percommittee is stalemated, then the political stakes will be even higher, because the mandated sequestration does not go into effect until January 2013. Congress would then have time to revisit all these issues before the next election or during a lame-duck session after the election. If President Obama is not re-elected, the next Con­gress and Republican president would have to address the issues.