Tax Reform

Tax Reform

Background     NMHC/NAA Position     Current Status 

Background 

With President Obama and Congress focused on reducing the nation’s deficit and debt levels, both Democrats and Republicans aim to overhaul the nation’s complex tax code to help spur economic growth and generate much-needed revenue. In addition, major pieces of the tax code have or are set to expire, including a so-called patch to protect 30 million taxpayers from the onerous alternative minimum tax (AMT) and the Bush-era tax cuts, creating uncertainty for millions of individuals and businesses. Although the 2012 election is likely to prevent tax reform from becoming a reality before 2013, there is general consensus on the need for fundamental tax reform and already significant discussion among policymakers about potential approaches.

NMHC/NAA Position

NMHC/NAA support a stable tax code that promotes investment in rental housing without unfairly burdening apartment owners and renters relative to other asset classes. We also urge lawmakers to:

• Protect the Low-Income Housing Tax Credit (LIHTC) program. The push for a simplified tax code is threatening this major financing incentive for low-income housing development. Any downsizing of the program would exacerbate the shortage of affordable rental units, which Harvard University estimates to be at least three million units.
  
  
• Extend current estate tax legislation. After allowing the estate tax to lapse in 2010, lawmakers passed a bill to reinstate the levy for 2011 and 2012, which maintained a $5 million exemption, a 35% tax rate, and a stepped-up basis regime for asset valuation, However, without further action, the tax will reset in 2013, featuring a $1 million exemption and a 55% tax rate, In the interest of promoting certainty and stability in the tax code, NMHC urges Congress to swiftly enact permanent estate tax legislation that retains a stepped-up basis regime along with a $5 million exemption and a 35% rate.

Current Status

Although tax reform is unlikely to occur prior to 2013 at the earliest, policymakers are already beginning to debate key issues and lay out proposals. For example, while Republicans favor tax reform that is largely revenue neutral, Democrats believe new revenues should be part of any new reform package. The tax reform debate will be further complicated by disagreements over which current-law credits and deductions to retain, with many popular deductions including those for mortgage interest, charitable giving, and state and local taxes becoming hotly contested. However, retaining these provisions limits the degree to which overall tax rates can be lowered.

Notably, on February 22, the Obama Administration released a corporate tax reform framework that would cut the top corporate tax rate from 35 percent to 28 percent. While lacking specifics in many areas, the Administration’s proposal, if enacted, could have a significant negative impact on multifamily firms, particularly those organized as partnerships. Specifically, the White House is proposing to finance the cost of the rate cut by taxing carried interest at ordinary income rates. It is also looking to generate revenue to pay for the tax cut by asking lawmakers to choose among forcing certain large partnerships to pay tax at corporate rates, reducing the deductibility of business interest and revising depreciation schedules.

Finally, even in the absence of tax reform, lawmakers will have to make key decisions impacting large portions of the tax before adjourning at the end of the year, given that Alternative Minimum Tax (AMT) relief expired at the end of 2011 and the Bush-era tax cuts lapse at the end of 2012. The current view is that those issues are likely to be addressed as part of a lame-duck session of Congress following the November election.

Relevant Committees

• Senate Finance
• House Ways and Means

Contact Information

Matthew Berger
Vice President of Tax
NMHC/NAA Joint Legislative Program
202/974-2362
mberger@nmhc.org 

Last Updated:  February 2012