Roundtable Weekly -- September 13, 2019

Policy Landscape

Congress Returns to Packed Agenda, Funding Deadlines

U.S. Capitol

Congress returned this week from recess to a full legislative agenda and a September 30 government funding deadline.  (Roll Call, Sept. 10) 

  • None of the 12 annual discretionary spending bills have been signed into law yet.  Lawmakers  still must negotiate appropriations affecting contentious issues such as funding for a wall on the southern border, which is overseen by the Department of Homeland Security.  Disagreements over wall funding led to the historic 35-day partial government shutdown in 2018–2019. (Politico, Jan. 25) 
  • Of interest to real estate, funding for the EB-5 Immigrant Investor Regional Center Program and the National Flood Insurance Program (NFIP) is also set to expire September 30 – the end of the current fiscal year.  FY’20 begins October 1.  (Roundtable Weekly, Feb. 15). 

  • In order to give lawmakers more time to negotiate spending levels and policy differences, congressional leaders have endorsed a stopgap funding bill, or Continuing Resolution (CR).  The CR emerging from discussions between House and Senate appropriators is expected to run through November 22.  Both EB-5 and NFIP are expected to be included within a funding extension measure.  (Wall Street Journal, Sept. 10 and The Hill, Sept. 9)   
     
  • Several tax priorities are also vying for attention and could form the basis for an end-of-year agreement on tax legislation.  These issues include tax extenders, clean energy incentives and tax technical corrections
     
  • On September 4, the National Multifamily Housing Council, The Real Estate Roundtable, and other industry organizations sent a letter to Congressional tax-writers urging them to enact a technical correction related to the cost recovery period for residential rental property.  The correction would clarify that taxpayers electing out of the new limitation on business interest deductibility can depreciate their existing rental properties over 30 years, rather than 40 years.  The 30-year period applies to newly acquired or constructed residential rental properties, and should also apply to existing holdings.  (Letter on Cost Recovery Period for Residential Rental Property under Section 163(j), Sept. 4) 

Congress is scheduled to be in legislative session for three weeks in September, three weeks in October and a few weeks in November.  Both chambers aim to adjourn for the year by December 13, 2019.

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Tax Policy

Top Senate Democratic Tax-Writer Proposes New Capital Gains Regime, Ending Preferred Rate

Sen. Ron Wyden (D-OR)

On Thursday, Senate Finance Committee Ranking Member Ron Wyden (D-OR) presented and released a detailed white paper outlining his plan to reform the taxation of capital gains.  (News Conference Video, Center for American Progress Action Fund, Sept. 12)   

  • Entitled “Treat Wealth Like Wages,” the proposal is billed by the top Democratic tax-writer in the Senate as “a plan to fix our broken tax code, ensure the wealthy pay their fair share, and protect Social Security.”  Sen. Wyden’s proposal would end the preferred tax rate for capital gains and impose annual mark-to-market taxation of capital assets for taxpayers above certain income thresholds.

  • Both proposals represent dramatic departures from existing tax law.  They are direct challenges to two fundamental principles that support capital formation, entrepreneurship, and long-term investment: (1) tax on capital gain should be deferred until it is realized, and (2) capital gain should be subject to a reduced tax rate.

  • The mark-to-market rules, which Sen. Wyden refers to as “anti-deferral accounting rules, would apply to taxpayers averaging $1 million in income or $10 million in assets over the last 3 years.  “Tradable” assets such as stocks and bonds would be subject to annual taxation of unrealized gains. Taxpayers could take a deduction for unrealized losses.

  • While “non-tradable” assets like real estate would not be subject to mark-to-market on an annual basis, they would be subject to an additional layer of tax – a “look-back charge” – for the theoretical benefit of the tax deferral when the asset is sold, or certain other revaluation events occur.  This look-back charge would be in addition to the capital gains tax, which would be set at the top ordinary income tax rate. 

  • The structure of the look-back charge is undefined.  Sen. Wyden’s paper describes a few options:  (1) an interest charge on deferred tax; (2) a yield-based tax designed to eliminate the benefits of deferral; or (3) a surtax based on an asset’s holding period.  The look-back charge would also be imposed at death, even if the asset is not sold (the basis of the asset would step up at death).

  • Special rules would apply for pass-through entities.  For example, the Wyden proposal would require a partnership to calculate the lookback charge when real estate is contributed to or distributed from the partnership – and report each partner’s share.

  • Built-in gain on existing assets would be subject to the tax, paid over an unspecified transition period.  The estimated $1.5 - $2 trillion of revenue raised from the proposal would be dedicated towards shoring up the long-term solvency of Social Security.  (CNBC, Sept. 12)

  • “Congress should strengthen tax rules that promote capital formation, not weaken them, which is what Sen. Wyden’s proposal would do,” said Real Estate Roundtable President and CEO Jeffrey DeBoer.  He added, “Rewarding risk-taking, long-term investment, and entrepreneurship is at the heart of the American economic model. By eliminating any tax incentive to pursue projects that have a pay-off that is far in the future, the proposal would discourage businesses and individuals from undertaking the long-term, capital-intensive investments that drive productivity and economic growth by deepening and enriching our Nation’s capital stock, including its commercial real estate.”   

    Sen. Wyden invited comments about the proposal on a wide variety of issues, such as how to calculate the look-back charge and whether debt should reduce the value of property when measuring a taxpayer’s aggregate assets.   The Roundtable’s Tax Policy Advisory Committee (TPAC) plans to review the proposal in detail and submit comments.  

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Energy Policy

Portman-Shaheen Energy Efficiency Bill Considered In Senate Hearing

Senators Jeanne Shaheen (D-NH) and Rob Portman (R-OH)

The Senate’s Energy Subcommittee on Wednesday held a hearing that considered bipartisan legislation to help further advance energy efficiency in U.S. buildings without federal regulations – but through data-driven, voluntary measures.

  • The Senate panel assessed the Energy Savings and Industrial Competiveness (ESIC) Act (S. 2137) – co-sponsored by Senators Jeanne Shaheen (D-NH), above at left, and Rob Portman (R-OH), right,  –along with nine other energy policy bills at the subcommittee’s Wednesday hearing. The Roundtable is a strong supporter of the Portman-Shaheen bill.

  • Sen. Portman testified at the hearing, noting that the ESIC Act passed the Senate by an overwhelming margin in a prior session of Congress.  He remarked that the legislation contains no “heavy-handed mandates” and that its building code sections are “completely voluntary.”  He added that the measure would result in “greenhouse gas emissions reductions [that] are equivalent to taking about 11 million cars off the road.”  (Portman press release, Sept. 11.)

  • Sen. Shaheen’s testimony emphasized that “energy efficiency is the cheapest, fastest way to deal with our energy needs,” and that the bill would produce a policy trifecta to reduce emissions, protect the environment, and create jobs.  (Shaheen press release, Sept. 11.)

  • The Roundtable submitted a letter for the hearing’s record to reiterate its support for the bill.  Roundtable President and CEO Jeffrey D. DeBoer also spoke in support of the bill when it was announced at a press conference in July.  (Video of DeBoer’s statement on Portman-Shaheen)

  • The ESIC Act “is exactly the kind of smart, forward-looking policy that will help building owners respond to our modern, evolving economy” DeBoer stated in a Senate news release upon the bill’s introduction this summer.  “The needs of business tenants have changed dramatically since the turn of the century to power the data centers, IT, and communications systems upon which our workforce depends.  Building owners are meeting their tenants' 24/7 energy demands while constructing and managing their assets more efficiently – and reducing their carbon footprints." (Roundtable Weekly, July 19, 2019)  

Companion legislation to S. 2137 is pending in the House (H.R. 3962), sponsored by Peter Welch (D-VT) and David McKinley (R-WV).  As the next step in the Senate’s process, a mark-up of S. 2137 by the full Senate Energy Committee is expected this fall.

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Housing Finance Reform

Senate Banking Committee and Administration Weigh In On GSE Reform Plan; FHFA Announces New Multifamily Cap Structure

Treasury's Housing Reform Proposal - Sept. 2019

The Senate Banking Committee's September 10 hearing on "Housing Finance Reform: Next Steps" focused on the Trump Administration's efforts to reform the U.S. housing finance system, including their proposal to overhaul the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.  

  • Treasury Secretary Steven Mnuchin testified before the committee about the Administration's Housing Reform Plan released last week to revamp and recapitalize the GSEs before releasing them from conservatorship.  The Administration’s goal is to reduce the federal government’s footprint in housing finance, increase the role of the private sector and private capital in the market and, eventually, return Fannie Mae and Freddie Mac to private shareholder ownership.   Mnuchin testified that if Congress fails to act, the Administration will pursue an agreement with the GSEs' regulator, the Federal Housing Finance Agency (FHFA) to change the terms of the government's bailout agreements reached 11 years ago.

  • The FHFA announced today a revised cap structure on the multifamily businesses of Fannie Mae and Freddie Mac.  The new multifamily loan purchase caps will be $100 billion for each organization, a combined total of $200 billion in support to the multifamily market, for the five-quarter period Q4 2019 – Q4 2020.  The new caps are significantly higher than the existing ones and apply to all multifamily business – no exclusions. To ensure a strong focus on affordable housing and traditionally underserved markets, FHFA directs that at least 37.5 percent of the Enterprises' multifamily business be mission-driven, affordable housing.

  • After Fannie and Freddie received $191 billion in government support during the financial crisis of 2008 and entered conservatorship, they have become profitable.  Under the Administration's plan, Fannie and Freddie profits would no longer go to Treasury, but would be dedicated to building their capital bases.  (Wall Street Journal, Sept. 10)

  • Mnuchin also testified that Treasury's plan “would preserve the longstanding government support of the 30-year, fixed-rate mortgage loan.”  The Treasury plan acknowledges the disincentives posed by regulatory barriers such as rent control and calls for enhancing private involvement in multifamily lending by refocusing the GSEs on affordable and workforce housing.

  • Democratic senators clashed with Republicans during Tuesday’s hearing, emphasizing the reform outlines would raise home borrowing costs and neglect lower-income homeowners.  Sen. John Kennedy (R-LA) called for a specific Administrative proposal, stating, "This whole thing is a car wreck. It’s a dumpster fire...We spent $190 billion of taxpayer money, and we’re in worse shape.”  (AP, Sept. 10)

  • The Roundtable submitted comments this week in advance of the hearing (Roundtable letter, Sept. 9).   The Roundtable and 27 industry organizations also submitted principles for reforming the GSEs in March. (Roundtable Weekly, March 1)

The path to reaching bipartisan consensus on housing finance reform remains unclear, especially before the 2020 presidential election.  Housing finance reform will be a focus of discussion with Housing and Urban Development (HUD) Secretary Ben Carson during The Roundtable’s Fall Meeting on October 30 in Washington.

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