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January 4, 2013

BUDGET & TAX POLICY
Congress Narrowly Averts “Fiscal Cliff,” While Setting Up New Battles Over Debt Ceiling and Federal Funding; Business Leaders Disappointed by Lack of Deficit Reduction, Prospect of More Political Bickering, Uncertainty


BUDGET & TAX POLICY

Congress Narrowly Averts “Fiscal Cliff,” While Setting Up New Battles Over Debt Ceiling and Federal Funding; Business Leaders Disappointed by Lack of Deficit Reduction, Prospect of More Political Bickering, Uncertainty  

After months of suspense about how the “fiscal cliff” drama would play out, the country technically went over the cliff on Jan. 1, but was prevented from feeling its impact when Congress voted near midnight on New Year’s Day for a compromise cobbled together by Vice President Biden and Senate GOP Leader Mitch McConnell (R-KY).

Swerving Cliff

Download Deloitte's "Swerving from the Cliff: Tax Provisions in the American Taxpayer Relief Act of 2012"

Although nearly all Senate Republicans voted for the “American Taxpayer Relief Act of 2012” on Tuesday morning, 151 House Republicans sought to block the measure in the evening, arguing that it consists almost entirely of tax increases. (GOP anger over the deal carried into Thursday’s House vote on the re-election of Speaker John Boehner [R-OH], who was ultimately re-elected after an apparent attempt to unseat him.) Although liberals also railed against the bill, 172 House Democrats joined 85 Republicans in voting for the measure, allowing it to clear the lower chamber and to be sent to President Obama for his signature.

Reflecting bipartisan distaste over the bill (and the process by which Congress had arrived at the vote), one House Democrat called it a “hold-your-nose” vote.”

Although the deal averts an immediate budget crisis by delaying “sequestration” budget cuts for two months — and ends some tax uncertainty by permanently indexing the AMT to inflation and locking in Bush-era tax rates for individual net incomes below $400,000 ($450,000 for families) — it sets the stage for months of renewed confrontations over the debt ceiling, entitlement reforms, and long-term deficit reduction.

(Because the White House and Congressional Budget Office [CBO] are using different “baselines” — with one assuming expiration of all the Bush tax cuts and the other assuming extension of the tax cuts — the president contends that the new law will cut deficit spending by $620 billion over 10 years, while CBO says it will raise the deficit by nearly $4 trillion over a decade.)  

While business leaders were generally relieved that the nation was pulled back from the cliff — a sentiment that helped lift global financial markets on Wednesday — they also expressed disappointment over the bill’s failure to rein in federal spending and resolve at least some of the partisan disputes over fiscal and budgetary policy, a sentiment shared by The Real Estate Roundtable.

Jeff_DeBoer_2010_FallRT

Roundtable President and CEO Jeffrey DeBoer echoed the mixed feelings that other industry executives have expressed about the bill — welcoming the fact that the cliff was averted, but criticizing the lack of a plan for long-term, structural deficit reduction.

“This virtual rolling thunder style of negotiation and lack of progress has done nothing to reduce uncertainty — uncertainty that continues to negatively impact investment and job growth,” one manufacturing CEO told The Wall Street Journal (Jan. 2). Added another, “It only gives us a very short-term view of the future. As business people, we plan one to three to five years out. Our political leaders can’t get more than 90 days resolution without more stagnation.”

In addition to raising tax rates on income over $400,000/$450,000, the new law increases the capital gains tax rate to 20 percent for higher-income earners (23.8 percent when combined with Obama’s new health care surtax). The capital gains rate remains at 15 percent for those below the $400,000/$450,000 threshold. 

As for estate taxes, also important to property owners and their ability to plan for their families, the new law raises the rate from 35 percent to 40 percent, but keeps the $5 million per-person exemption (which will be indexed for inflation), as well as stepped-up basis for inherited assets. 

In a positive development for commercial real estate, the law retroactively reinstates 15-year leasehold improvement depreciation (which had expired at year-end 2011, forcing property owners to depreciate such assets over a much longer, 39-year depreciation schedule).

Roundtable President and CEO Jeffrey DeBoer echoed the mixed feelings that other industry executives have expressed about the bill — welcoming the fact that the cliff was averted, but criticizing the lack of a plan for long-term, structural deficit reduction.

“While we are relieved that the U.S. economy will be spared the worst effects of the cliff — at least for now — the law enacted this week does nothing for deficit reduction and fails to put in place a mechanism for dealing with this urgent issue in the future,” said DeBoer, adding that deficit spending and unsustainable levels of debt “remain a drag on economic growth and job creation and put upward pressure on long-term interest rates.”

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After surviving an apparent challenge to his leadership as House Speaker yesterday, Boehner pledged to continue working to reduce the government’s $16 trillion debt.

Real estate fundamentals are tied closely to job creation, which influences business demand for space, commercial vacancy rates, net operating income (NOI) and property values (which, in turn, are a key determinant of tax revenues collected by local governments for essential public services).

With so many new faces in Congress this year, DeBoer said it more is important than ever for the real estate industry to continue educating policymakers about the industry’s vital role in job creation and the U.S. economy.  

After surviving an apparent challenge to his leadership as House Speaker yesterday, Boehner pledged to continue working to reduce the government’s $16 trillion debt, which he said is “draining free enterprise and weakening the ship of state.” For the new 113th Congress sworn in yesterday, “nothing is more important,” he added.

“Our government has built up too much debt. Our economy is not producing enough jobs. These are not separate problems,” he concluded (The Hill, Jan. 3).  

Summary of key provisions of The American Taxpayer Relief Act:

Income tax rates: Current income tax rates are extended for families earning $450,000 or less and individuals earning $400,000 or less annually. Taxpayers earning more than these thresholds will be taxed at 39.6%, up from 35%.

Investment tax rates: The top capital gains and dividend rate remain at 15% for those below the $450,000/$400,000 income thresholds, and are increased to 20% for those with incomes above those amounts. Current law remains in place for carried interest.

Estate tax: The current $5 million per-person estate tax exemption remains (with the $5 million indexed for inflation) but the rate is increased to 40% from the current 35%. 

Tax extenders: Individual and business tax extenders (including 15 year depreciation for leasehold improvements placed into service after 12-31-11) are extended through 2013.  

Bonus depreciation: The 50% bonus depreciation provision is extended for one year (also applicable to leasehold improvements).

The Research and Development (R&D) tax credit was extended through 2013.  

Work Opportunity Tax Credit extended one year; Section 179 – keeps in place the 2010/2011 levels of a maximum amount of $500k and $2 million phase-out for 2012 and 2013;   

Accelerated Depreciation —provides for 50 percent expensing for qualifying property purchased and placed in service before January 1, 2014 (and January 1, 2015 for certain long-term assets and transportation).  

Alternative Minimum Tax (AMT): The individual AMT is patched permanently.  

PEP and Pease: The personal exemption phase-out (PEP) and overall limit of itemized deductions (Pease) is reinstated for families with incomes over $300,000 and individuals with incomes over $250,000.  

Other credits: The American Opportunity Tax Credit, the enhanced Child Tax Credit, and the enhanced Earned Income Tax Credit from the American Recovery and Investment Act (the “stimulus”) are extended for five years.  

“Doc fix”: The patch on the 29% cut in Medicare provider payments is extended for one year.  

Sequester delay: The $109 billion spending cuts mandated by the Budget Control Act are averted for two months due to $12 billion in spending cuts split evenly between defense and non-defense spending and $12 billion of increased revenues applied as an offset.   

Extended unemployment insurance: Federal extended unemployment insurance will continue for another year. 

Additional details may be found in the full text of the compromise law, available online.   Also see a summary in Venable's January 2013 Tax Bulletin.

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