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July 14, 2017

POLICY LANDSCAPE
Congress Returns, Senate Delays Summer Recess to Tackle Healthcare Vote, Debt Ceiling and Other Policy Deadlines Before Tax Reform Push

TAX POLICY
Treasury Targets Tax Regulations Affecting Real Estate as Part of President’s Regulatory Reform Initiative


POLICY LANDSCAPE

Congress Returns, Senate Delays Summer Recess to Tackle Healthcare Vote, Debt Ceiling and Other Policy Deadlines Before Tax Reform Push

With Congress back in session this week from a 4th of July recess, Washington lawmakers face a daunting summer agenda – including a highly-anticipated vote on healthcare legislation, defense funding, raising the nation’s debt limit and other pressing priorities – before they hope to begin addressing tax reform. 

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Senate Majority Leader Mitch McConnell (R-KY) announced this week  that the Senate will delay the start of the August recess until the third week of August to address pressing policy priorties.

Senate Majority Leader Mitch McConnell (R-KY) announced on Tuesday, “In order to provide more time to complete action on important legislative items and process nominees…the Senate will delay the start of the August recess until the third week of August. Once the Senate completes its work on health care reform, we will turn to other important issues including the National Defense Authorization Act and the backlog of critical nominations.”  McConnell also told reporters, “We've got defense authorization, we've got debt ceiling, we've got the FDA user fee and other important legislation that we need to address and we simply…don't have enough time to address all of these issues between now and the originally anticipated August recess.” (BNA, July 11)

The revised Senate healthcare bill unveiled yesterday preserves Obamacare’s 3.8 percent net investment income tax and 0.9 Medicare payroll tax on upper-income households. These two taxes would bring in 230 billion dollars over 10 years to the government. Other tax increases under the Affordable Care Act, such as the excise taxes on medical devices and high-cost employer-sponsored health coverage, would still be repealed. (Wall Street Journal, July 13 and text of the revised Senate healthcare bill). 

To advance healthcare legislation in the Senate by majority vote (and thereby avoid a filibuster from Democrats), GOP policymakers are using a special budget process called reconciliation.  Since Senate rules allow only one reconciliation procedure at a time, tax reform must wait.  Before using reconciliation to move a tax bill, Congress must also raise the debt ceiling and pass a fiscal year 2018 budget to avert a government shutdown on September 30.  (New York Times, July 10)

If the Senate passes healthcare legislation soon and sends it to the House, Speaker Paul Ryan (R-WI) said yesterday that the House will also stay in session during their scheduled August recess. (BNA, July 13)

Rep. Mark Meadows (R-NC), chairman of the influential House Freedom Caucus, added this week that the House should not recess for August before addressing healthcare, the debt ceiling and starting on tax reform. (Morning Consult, July 12)

Congressional Tax Committees Move Forward

Congressional tax-writing committees this week continued moving ahead on their tax reform agendas, with a House Ways and Means subcommittee hearing yesterday on small business taxation. 

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House Ways and Means Tax Policy Subcommittee Chairman Peter Roskam (R-IL)

During the hearing, Tax Policy Subcommittee Chairman Peter Roskam (R-IL) said policymakers are considering writing tax reform rules that would prevent large companies from taking advantage of pass-through business tax rates intended for small businesses.  His fellow subcommittee members are “very mindful of some of the concerns in terms of anti-abuse rules on the pass-through treatment,” Roskam said. (Morning Consult, July 13)

Roskam also commented that Republicans are considering ways to allow small businesses to deduct interest expenses. The current GOP tax reform “blueprint” proposes eliminating interest deductibility but allow companies to immediately write-off capital investment expenses. 

Commenting on the needs of small business to deduct interest expenses, Roskam said, “Part of the feedback has been a sensitivity to people who have no access to capital in other forms, and they need to go out and borrow money, and they need to make sure that they’ve got the ability to acquire that. There’s a recognition that there’s a special need on the part of somebody who’s just getting out, and the idea that they wouldn’t have that deduction seems like too high of a burden, so let’s fix it for them.”  (House Ways and Means, July 13)

The Businesses United for Interest and Loan Deductibility (BUILD) Coalition submitted a letter to the Senate Finance Committee on July 6 outlining the need to preserve full interest deductibility for American businesses. The comments emphasize how businesses of all sizes and across all sectors rely on the ability to deduct interest expense to access capital that is critical for growth and job creation. (The Hill, July 6).

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Senate Finance Committee Chairman Orrin Hatch (R-UT) announced a July 18 tax policy hearing  that will include testimony from former Treasury Department Assistant Secretaries for Tax Policy

Efforts to preserve interest deductibility and the 1031 like-kind exchange by The BUILD Coalition and The Real Estate Roundtable were also profiled yesterday in a CoStar article.

Additionally, upcoming tax hearings were announced this week in both the House and Senate. Ways and Means Tax Policy Subcommittee Chairman Roskam announced a July 19 hearing on tax reform ideas that aim to simplify the tax code, reduce tax burdens on Americans and deliver economic growth that creates jobs. 

Senate Finance Committee Chairman Orrin Hatch (R-UT) announced a July 18 tax policy hearing to explore how Congress can reform the tax code to help promote economic growth, spur new job creation, and increase America’s competitiveness.  “By bringing together former Treasury Department Assistant Secretaries for Tax Policy, our committee will gain a better understanding of not only the challenges we face with a comprehensive tax overhaul, but also the significant benefits meaningful reforms would bring to the American people,” Hatch said.

Hatch also told reporters on July 11 that the additional two weeks added to the Senate calendar allows policymakers to make more progress on a unified plan to overhaul the tax code.  He commented that after the Senate has worked through health care reform, “we'll move” on taxes. (BNA, July 11) 

In a recent speech on the Senate floor, Hatch stated, “I think there is a remarkable amount of agreement, at least among Republicans, on the major issues we need to deal with to fix our broken tax code. Republicans in the Senate, the House, and the White House agree on about 80 percent of the major tax reform issues, and a number of key and fundamental questions are answered in that 80 percent.”  (Senate Finance Committee, March 30)

Treasury Secretary Steven Mnuchin commented on the White House's goals for tax reform on Sunday on ABC’s This Week. “We’re absolutely committed to getting tax reform done this year, Our plan is to have a full-blown release of the plan in the beginning of September, with being able to vote and getting this passed before the end of the year,” Mnuchin said.  

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TAX POLICY

Treasury Targets Tax Regulations Affecting Real Estate as Part of President’s Regulatory Reform Initiative

The Treasury Department on July 7 identified five real estate-related regulatory projects for modification or withdrawal as part of President Trump’s regulatory reform initiative aimed at reducing burdens on taxpayers and promoting economic growth. 

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Of the eight sets of tax regulations listed in the Treasury notice  for modification or withdrawal,  five are of importance to real estate.

An April 21 White House executive order on Identifying and Reducing Tax Regulatory Burdens directed the Treasury Department to examine “significant” regulations issued in 2016 and identify those that pose an undue burden on taxpayers, add undue complexity to Federal tax laws, or exceed the statutory authority of the Internal Revenue Service.  (Roundtable Weekly, April 21).

Of the eight sets of tax regulations listed in the Treasury notice, five are of importance to real estate:

    1. Proposed regulations related to family business estate tax valuation discounts (section 2704);
    2. Proposed and final regulations related to partnership liability allocation rules and bottom dollar guarantees (section 752);
    3. REIT spin-off regulations under the PATH Act;
    4. Final cross-border debt-equity regulations (section 385);
    5. Proposed regulations altering the definition of a political subdivision for purposes of tax-exempt bonds.

According to the Notice, “Treasury intends to propose reforms — potentially ranging from streamlining problematic rule provisions to full repeal — to mitigate the burdens of these regulations in a final report submitted to the President.”  Treasury has requested public comments about this set of regulations by August 7, before a final report is due to President Trump by September 18.

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"An Economic Analysis of Proposals to Limit the Recognition of Valuation Discounts for Transfers of Interests in Large Family Businesses" by Robert J. Shapiro

The Real Estate Rountable had previously urged the Treasury Department to withdrawal or modify the regulations related to family business valuation discounts, partnership liability allocation rules, and cross-border lending arrangements. 

In December of last year, Stefan Tucker (Partner, Venable LLP) and a long-time member of The Roundtable’s Tax Policy Advisory Committee, testified on The Roundtable’s behalf at an IRS hearing on the proposed changes to the estate tax regulations, which would make it more difficult for families to pass on real estate businesses to the next generation without liquidating holdings in order to pay estate tax liabilities.  (Roundtable Weekly, December 2, 2016).   In June, The Roundtable submitted a study to Treasury on the economic impact of the proposed estate tax rules.  The study concluded that the impact would be far-reaching and severe, costing the U.S. economy nearly 106,000 jobs and reducing GDP by more than 150 billion dollars over the next 10 years alone.  (An Economic Analysis of Proposals to Limit the Recognition of Valuation Discounts for Transfers of Interests in Large Family Businessesby Robert J. Shapiro  )

The notice also addresses a separate February 24 Executive Order on Enforcing the Regulatory Reform Agenda.   This additional White House directive instructs Treasury to conduct a broader review of existing regulations that should be modified or eliminated in order to reduce unnecessary burdens — including tax regulations beyond those addressed in the current list. Treasury invited public comment concerning these broader regulations by July 31.

Real Estate Roundtable President and CEO Jeffrey DeBoer sent a letter to Treasury Secretary Steven Mnuchin on April 7 outlining eight regulatory actions the Treasury Department could take to stimulate new real estate investment, job creation, and economic growth.  The recommendations relate to critical issues such as the Foreign Investment in Real Property Tax Act, tax accounting for new condominium construction, the tax treatment of private real estate funds, partnership tax rules, and more. 

The Roundtable is working on formal responses to the most recent Treasury announcement with members of its Tax Policy Advisory Committee (TPAC), chaired by Frank Creamer (FGC Advisors, L.L.C.).

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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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