Background NMHC/NAA Position Current Status
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 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:
- Enact comprehensive tax reform. Economic and political forces are focused on lowering the U.S. corporate tax rate, which, will be the highest among the industrial nations after the current leader, Japan, reduces its rate in April. Reducing corporate tax rates is a worthy goal, but lawmakers should remember that many businesses, including apartment owners and developers, are organized as partnerships, which are taxed at the individual rate. These job-creating firms should not be punished with higher taxes. For instance, some policymakers have floated the idea of requiring partnerships with incomes over certain thresholds to pay tax at a higher corporate rate; others have looked to reduce credits and deductions, creating a policy where partnerships would lose tax benefits but see no tax rate reduction. To ensure that we avoid harming a large segment of American employers, tax reform needs to address both the individual tax code and the corporate tax code.
- Maintain current tax treatment of carried interest. For some time now, lawmakers have sought to reign in high-flying hedge fund managers by proposing to eliminate capital gains treatment of a carried interest (or promote) and taxing it as regular income instead. However, many misconceptions surround this proposal. Most important is that it only affects hedge funds. In reality, it affects all investment partnerships, and 46% of all those are real estate with the vast majority of them using a carried interest structure. A carried interest is not new and is not a "tax loophole" as some have suggested. It has been used as an investment model in commercial real estate for several decades. No matter how it is characterized politically, raising taxes on a carried interest is bad for the entrepreneurs and small businesses that need capital to innovate, grow, build and create jobs.
- Retain the deduction for business interest. Efforts to prevent companies from overleveraging are leading to calls to scale back the current deduction for business interest expenses. Unfortunately, reducing this deductibility would greatly increase the cost of debt financing necessary for large-scale projects, curbing development activity.
- 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.
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.
- House Ways and Means
Vice President of Tax
NMHC/NAA Joint Legislative Program
Last Updated: February 2012