Congress Begins Work On Tax Cut Legislation

September 18, 1998

The U.S. House of Representatives is moving forward on a tax bill (H.R. 4579, the Taxpayer Relief Act of 1998) that would provide about $80 billion in tax relief over the next five years. While most of the tax bill would be paid for by using a portion of the projected budget surplus, some of the revenue would come from the NAREIT-supported closing of a corporate tax planning technique involving private, captive REITs. H.R. 4579 does not include Speaker Gingrich's proposed capital gains rate reduction or any of the REIT-related tax provisions in the Administration's proposed budget for Fiscal Year 1999.

H.R. 4579, which the House Ways & Means Committee approved yesterday largely on partisan lines, contains provisions that would reduce estate taxes, lessen the tax penalty for marriage, extend several expired tax provisions through February 29, 2000, and provide other tax relief. The bill also includes language (virtually the same as H.R. 3947 and S. 2122 that NAREIT endorsed in May) that would require a corporation that liquidates an 80% or more owned REIT to recognize the liquidating REIT's dividends as income.

H.R. 4579 would exclude $200 ($400 in the case of a joint return) of interest and dividends from an individual's income. For REIT dividends, the exclusion would be limited to the amount of the dividend attributable to the REIT's interest income. (The entire exclusion would be available if at least 95% of the REIT's ordinary gross income consisted of interest income). Thus, this exclusion would benefit shareholders of mortgage REITs more than investors in equity REITs. Also, the exclusion would not apply to a REIT's capital gain distribution. The limitations on the dividend exclusion would parallel limits on mutual fund dividends.

The House Republican Leadership calls H.R. 4579 the "90-10 Plan" because the tax cut would use only 10% of the projected budget surplus, 90% of which would remain available to pay for social security reform. However, the White House has indicated that it would veto any tax cut bill financed by the projected surplus.

The House of Representatives is expected to approve H.R. 4579 next week, although many Democratic legislators are expected to vote against it. The bill is expected to face opposition in the Senate from Democrats who oppose the use of the budget surplus to pay for a tax cut. Republicans would need 60 votes to waive a procedural point of order against funding tax cuts with the surplus.

Should the bill fall short of the votes needed to approve it or if the President vetoes the bill, Republicans likely would try to move a "stripped-down" tax bill containing the extension of expiring tax provisions toward the end of the legislative session ending in October. Such a bill usually garners bipartisan support, but it is unclear whether the Senate would approve any tax bill without adding other provisions. It is anticipated that the liquidating REIT provision would be used to pay for a narrower bill.

Please contact NAREIT's Government Relations Department if you would like to discuss this proposed tax legislation in further detail.