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March 17, 2017

TAX POLICY
Obamacare, Budget and Internet Sales Tax in the Spotlight at Midpoint of Crucial Congressional Work Period

WHITE HOUSE BUDGET & ENVIROMENTAL POLICY
President Trump Unveils Federal Budget Blueprint for FY 2018; ENERGY STAR Among EPA Programs Slated for Cuts


TAX POLICY

Obamacare, Budget and Internet Sales Tax in the Spotlight at Midpoint of Crucial Congressional Work Period  

Congress approached the midpoint of a six-week work session critical to Republicans’ ambitious agenda as legislation to repeal and replace Obamacare passed a key test and stakeholders unveiled new research on the harm caused by states’ inability to collect sales tax on internet transactions. 

On Thursday, the House Budget Committee voted 19 to 17 to report favorably the American Health Care Act to the House of Representatives.  (Robert Pear & Jonathan Martin, Trump and G.O.P. Work to Win Repeal of Obama’s Health Act, New York Times, March 16, 2017).  Three Republicans joined all 14 Committee Democrats in opposing the bill.  The panel rejected several motions by Committee Democrats seeking amendments that would preserve elements of the Affordable Care Act, including the 3.8 percent tax on net investment income, which can include real estate rental and capital gains income.  The American Health Care Act now moves to the House Rules Committee, which will determine the amendments that can be offered on the House floor. 

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USA Today cited research showing that the effective tax rate on partnerships is 29.4 percent, compared to 17.8 percent for C corporations 

Earlier in the day, President Trump released his initial budget request for FY 2018 (see story below).  The initial budget submission does not address how the new Administration intends to approach tax reform, new infrastructure investment, and spending on entitlement programs.  At a Thursday afternoon press briefing, Mick Mulvaney, the President’s budget director, shed additional light on the timing and sequencing of tax reform and an infrastructure initiative, “[T]he infrastructure program is something we’ve just recently started.  It won’t probably come until summer or maybe even early fall.  We have to do Obamacare repeal and replace first, then tax reform second.  That leaves infrastructure probably third, which may come after the August recess in Congress.”  Press Secretary Spicer promised additional details when a full budget is released in May.

In the absence of clear signals from President Trump and his economic team on the specific tax reforms the Administration supports, the House Republican tax reform blueprint continues to dominate the tax reform debate in Washington.  While much of the attention has focused on the need to reduce the top corporate tax rate, lawmakers are increasingly recognizing that a large share of U.S. businesses is organized in partnerships or other pass-through form.  On Thursday, USA Today cited research showing that the effective tax rate on partnerships is 29.4 percent, compared to 17.8 percent for C corporations (Roger Yu, Small Firms Seek Level Playing Field in Tax Reform, USA Today, Mar. 16, 2017).  Nearly half of the country’s 3.5 million partnerships are real estate partnerships.  “You can’t have a tax reform that favors one type of business,” said Pinar Cebi, a senior economist with the American Council for Capital Formation, in the USA Today article.  The House blueprint would lower the top tax rate on corporations to 20 percent and the top tax rate on the active business income of pass-through businesses to 25 percent.

Lastly, the National Conference of State Legislatures and the International Council of Shopping Centers have released new research quantifying nearly 26 billion dollars in uncollected state and local sales taxes in 2015 resulting from electronic commerce and the unlevel playing field for brick-and-mortar retailers.  Today, states may only compel retailers to collect sales tax if the retailer has a physical presence in the state.  For several years, The Real Estate Roundtable has supported the efforts of ICSC and others to pass legislation that would finally end the tax discrimination against physical stores and allow states to impose sales tax collection requirements on internet retailers.  In recent months, Congress’ failure to act has led several states to pursue their own measures, which they hope will lead the Supreme Court to overturn prior case law in this area.  Jennifer McLoughlin, The Future of Online Sales Tax: What if They Fail to Kill Quill, Accounting Today, Feb. 28, 2017).

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WHITE HOUSE BUDGET & ENVIROMENTAL POLICY

President Trump Unveils Federal Budget Blueprint for FY 2018; ENERGY STAR Among EPA Programs Slated for Cuts  

President Donald J. Trump unveiled his first federal budget blueprint on Thursday for the next fiscal year starting October 1, reflecting his intentions to reduce the size of the federal government by cutting budgets across agencies and slashing the size of the federal workforce.

Trump stated the reasoning for his suggested budget is driven by the importance of national security and public safety, with a 54 billion dollar increase in defense spending to rebuild the nation’s military without adding to the federal deficit (as offset by reductions in other discretionary spending).

Both Republicans and Democrats expressed initial resistance against Trump’s proposed budget stating it would not pass Congress in its current form. (E.g.: “Trump Budget Likely to See Major Rewrite in Congress,” (Wall Street Journal, March 16); "Republicans Pan Trump Budget," (POLITICO, March 16)). Annual White House budget requests are historically only used as guidance for Congress which “controls the power of the purse” and must ultimately enact bills and funding measures for federal spending. (The Hill, March 16)

Among the departments proposed to take the biggest hits: The Environmental Protection Agency (EPA) with a 31 percent decrease, the State Department with a 29 percent decrease, and the Agriculture and Labor Departments with 21 percent decreases in their respective spending budgets. 

Departments and agencies that will receive overall cuts could receive funding boosts for defense capabilities. For example, the Energy Department would receive more money to maintain the nation’s nuclear weapons system even as its science and climate-related programs are cut.

According to USA Today (March 16, 2017), House Speaker Paul Ryan (R-WI) described the plan as a "blueprint," praising its goals but not endorsing it in total. "We are determined to work with the administration to shrink the size of government, grow our economy, secure our borders, and ensure our troops have the tools necessary to complete their missions," Ryan said. "I look forward to reviewing this with the Appropriations Committee and our entire conference.”

While the budget did not provide any information regarding Trump’s potential infrastructure plan, White House budget director Mick Mulvaney said a full budget would be released in May which will contain the president’s plan for Medicare and Social Security, along with 10-year projections for taxes and spending.

Trump Proposes De-Funding ENERGY STAR

Of notable concern to CRE is Trump’s budget proposal to de-fund EPA’s ENERGY STAR program – a voluntary public-private partnership that encourages real estate industry leaders to achieve and be recognized for high energy efficiency performance in their assets.

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"The voluntary ENERGY STAR buildings program creates jobs," says Anthony E. Malkin (Chairman and CEO, Empire State Realty Trust)

Over 44 billion square feet of U.S. commercial floor space—50 percent of the market—use ENERGY STAR’s online tool to measure and track energy and water use as a key platform that saves buildings and businesses billions of dollars each year. To attract investors and tenants, many Roundtable members strive to earn the well-recognized ENERGY STAR building label to distinguish their assets as top performers in the marketplace.       

"The voluntary ENERGY STAR buildings program creates jobs, enhances competitiveness, increases energy independence, and saves money for American families and businesses,” said The Roundtable’s Sustainability Policy Advisory Committee (SPAC) Chairman Anthony E. Malkin (Chairman and CEO, Empire State Realty Trust.)  “Americans with ENERGY STAR residences receive improved pricing on mortgages, lowering their monthly bills.”

The Energy Department’s "2017 U.S. Energy and Employment Report" noted the importance of construction and manufacturing jobs related to energy efficiency in the U.S. economy, boosted by the ENERGY STAR program.  According to the report, 2.2 million Americans are employed, in whole or in part, in the design, installation, and manufacture of energy efficiency products and services, adding 133,000 jobs in 2016.   Almost 1.4 million energy efficiency jobs are in the construction industry.

“The ENERGY STAR program spurs innovation and requires skilled American jobs for building design, construction and management, which pay well and deliver investments with attractive payback periods and returns,” Malkin continued.  “There are no tax credits, tax deductions, or government hand-outs.  This is the sort of program which should be continued and copied, not abridged or undermined in any way.”

In coalition with other real estate groups and industry stakeholders, The Roundtable will make the business case for Congressional appropriators and other policy makers on the importance of the ENERGY STAR program to the U.S. economy and the need for its continued funding.

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For questions about Roundtable Weekly, please contact The Roundtable's Scott Sherwood at rweekly@rer.org or (202) 639-8400.

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