Will “Regular Order” Lead to Big Policy Changes?

Spring 2013

At the close of 2012, many feared the United States would fall off the so-called “fiscal cliff” — the combination of scheduled tax increases, deep mandated across-the-board federal budget cuts (known as “sequestration”), and expiration of numerous tax provisions which, if occurring at once, could have caused another recession.

This scenario was avoided when Congress passed, and President Obama signed, the American Taxpayer Relief Act of 2012 (the “Fiscal Cliff legislation”). The bill, while doing nothing to improve the country’s long-term fiscal condition, averted income tax increases on most Americans (except those earning more than $400,000 annually), and postponed until March 1, the scheduled budget sequester. It did not, however, raise the federal statutory borrowing limit (known as the “debt ceiling”) as President Obama had demanded, setting the President on a collision course with Congress for a mid-February confrontation, when the debt limit would again need to be increased.

Wary of the politics of another debt-showdown with the President, House Republicans passed a second piece of legislation on January 23 to allow the government to continue borrowing through May 18. Rather than having the political debate center around whether House Republicans were willing to allow the country to default on its debts, this would shift the debate to deficit reduction, considered more politically favorable. Republicans could then use the March 1 sequester date, as well as the March 27 date when current funding for the government expires, to force action on spending cuts. If Congress does not pass legislation to modify or delay the sequester by March 1, then budget cuts will ensue. If Congress does not reach agreement by March 27 on spending levels for the rest of 2013, or fails to pass another temporary spending measure, a government shutdown will result.

Aside from shifting the short-term political dynamics, however, the move by the House to delay a debt limit showdown could open the door to long-term, profound policy changes. This is because the bill requires the Senate and House to pass budget resolutions setting forth revenue and spending targets for future years. Dubbed the “No Work, No Pay” bill, Senators would be required to pass a budget by mid-April, or they would not receive their salaries, which would be placed in an escrow account until they passed a budget, up to the end of the year.

Why is this important? Withholding the salary of Senators, most of whom are millionaires, is unlikely by itself to force action. But the overtly populist measure is intended to focus the attention of the public on what has been a complaint of House Republicans — the Senate’s failure to comply with federal budget laws and adopt a budget since 2009, as they are required to do.

Under budget rules, if both the House and Senate pass budgets, then a resolution reconciling both of them (a budget reconciliation) can be developed. The budget reconciliation is essentially an outline for future fiscal policy by setting forth the agreed upon levels of revenue, federal outlays, debt and deficits. It can contain specific binding instructions to the tax and appropriations committees of both the House and Senate, instructing them to develop legislation to accomplish the goals outlined in the budget. But the most important element of the budget reconciliation process is that a budget reconciliation bill is protected from a Senate filibuster. The bill needs only 51 votes to pass, rather than the 60 votes usually needed to prevent a filibuster and move to a Senate vote on legislation.

Having the Senate follow established budget procedures is what House Republicans mean when they demand that the Senate return to “regular order” and pass a budget. This would force tough votes on levels of entitlement spending, taxes and other government spending that could then be enforced. Because the legislation can pass by simple majority, a single Senator threatening a filibuster cannot derail it. A Senate return to “regular order,” then, creates much more favorable conditions by which controversial broad-based deficit reduction measures, including comprehensive tax reform, can be undertaken in earnest.

The March negotiations over spending levels, as well as the Senate returning to “regular order” on the budget, will present challenges to the commercial real estate industry and NAIOP members. The Fiscal Cliff legislation included several NAIOP-supported tax provisions, such as 15-year qualified leasehold improvement depreciation, 50 percent bonus depreciation and New Markets Tax Credits. Kept out of the bill were proposals to tax carried interest at ordinary income rates (up to 39.6 percent) rather than as capital gains (now 20 percent). The continuation of these policies cannot be taken for granted, and most assuredly proposals to increase taxes on carried interest and to discontinue provisions important to commercial real estate will be raised in both arenas as revenue raising measures that can offset spending reductions. In January, New York Senator Charles Schumer noted, “We’re going to do a budget this year and it’s going to have revenues in it, and our Republican colleagues better get used to that fact.” NAIOP will remain active in advocating for the interests of the commercial real estate industry during all of these negotiations.