As Congress approaches the Memorial Day recess when members will return to their districts for parades, town hall meetings and spirited conversations with constituents, the House Ways and Means and Senate Finance Committees used the last two weeks of May to hold hearings on tax reform - arguably Congress’ most significant priority apart from healthcare. As a number of factors have combined to potentially push legislative action until later this year, tax writers held hearings to examine key issues and build momentum for reform.
NMHC/NAA took advantage of both the Ways and Means and Finance Committee hearings to continue our aggressive education efforts focused on stressing the apartment industry’s tax reform priorities. Our team has focused on a few core principles that show how real estate relies on the free-flow of capital and emphasize that investment decisions are driven by after-tax rates of return rather than by statutory tax rates standing alone. Therefore, the number of layers of taxation, the marginal rate of tax imposed on income, cost recovery rules, investment incentives and taxes imposed when properties are sold, exchanged or transferred to heirs are all critical in assessing the viability of an investment. In developing reform proposals, the apartment industry is calling on Congress to enact tax reform that:
- Protects Pass-Through Entities from Higher Taxes or Compliance Burdens;
- Ensures Depreciation Rules Avoid Harming Multifamily Real Estate;
- Retains the Full Deductibility of Business Interest;
- Preserves the Ability to Conduct Like-Kind Exchanges;
- Maintains the Current Law Tax Treatment of Carried Interest;
- Preserves and Strengthens the Low-Income Housing Tax Credit;
- Maintains the Current Law Estate Tax; and
- Repeals or Reforms the Foreign Investment in Real Property Tax Act (FIRPTA) to Promote Investment in the Domestic Apartment Industry.
The prospects for tax reform remain, at best, uncertain. The Trump administration and Republicans in both the House and Senate are trying to coalesce around a consensus path forward, but challenges are rampant. While it was once hoped a joint bill could be finalized by the August recess, there is growing consensus that the end of 2017 is now a more likely target. Before Congress can move forward, many key design features will have to be resolved, including whether a package should be deficit neutral and whether a consumption tax is preferable to today’s income tax.
At Ways and Means Committee hearings on May 18 and 23, lawmakers and witnesses focused on how tax reform could drive economic growth. Republican members focused on key areas of their Tax Reform Blueprint, including the benefits that lower statutory tax rates and immediate expensing, as opposed to depreciation of business assets. Members also considered the pros and cons of a proposal to move toward a border-adjustable consumption tax. Notably, Rep. Jim Renacci (R-OH) mentioned the critical role that interest deductibility plays in driving business activity and job creation. The House Republican Tax Blueprint proposes to eliminate interest deductibility in favor of full expensing.
Finally, the Senate Finance Committee held a May 25 hearing with Treasury Secretary Steven Mnuchin focusing on President Trump’s Fiscal Year 2018 Budget and proposals to overhaul the tax code. The Budget released earlier this week added no new detail to the President’s late April proposal to reduce statutory tax rates on business and individual income.
More in-depth analysis of the recent tax reform hearings conducted by Capitol Tax Partners can be found below:
- Insights: Summary of Ways and Means hearing on “Increasing U.S. Competitiveness and Preventing American Jobs from Moving Overseas”