August 8, 2013
Highlights of the Issues:
Tax Reform Continues to be Main Topic of Conversation
With Congress departed for the August District Work Period, the path towards comprehensive tax reform remains bumpy, at best. While there has been a great deal of activity in Congress around tax reform, it remains unclear if comprehensive tax reform is achievable either as a standalone legislative effort, or as part of a broader “grand bargain” related to the federal budget or the statutory debt limit. Perhaps the greatest challenge will be overcoming the gulf that currently separates the Republican leaders who want tax reform to be “revenue-neutral” and the Democratic leaders, including President Obama, who have called for tax reform to generate significant revenue, perhaps as much as $1 trillion over 10 years, in order to reduce federal deficits.
In the House of Representatives, House Ways and Means Committee Chairman Dave Camp (R-MI) is clearly committed to advancing a revenue-neutral reform proposal. Over the past several months, Chairman Camp has released three detailed “discussion drafts” of legislation that would reform international taxation, the taxation of small businesses and pass-throughs, and the taxation of financial products, like derivatives. NAREIT has submitted detailed comments on each of these three drafts (international, small business, and financial products). Chairman Camp has also conducted a series of outreach meetings to his colleagues in the House on both sides of the aisle. It is widely expected that the Chairman will release a comprehensive revenue-neutral draft, outline or “Chairman’s Mark” for a possible October “mark-up” in the Ways and Means Committee. At this point, it is expected that there will not be bipartisan support for this as-yet unreleased bill. Finally, a wild card in the House is the fact that Chairman Camp is both term-limited in his role as the senior Republican on the Committee and is reportedly exploring whether to run for the Senate to replace the retiring Senator Carl Levin (D-MI).
Chairman Camp has a partner in Senate Finance Committee Chairman Max Baucus (D-MT). Like Camp, Baucus – who has announced his intention to retire at the end of the 113th Congress – will be leaving his position as Chairman at the end of 2014. The two Chairmen have been working closely and traveling around the country together in an effort to build up public support for, and momentum behind, a comprehensive re-write of the tax code. Unlike Camp, Baucus has not yet released any detailed legislative proposals. Instead, he and Finance Committee Ranking Member Orrin Hatch (R-UT) released a series of papers that listed many tax proposals made by the Administration, legislators, commissions and even media reports and more recently established a so-called “blank slate” process. The Baucus-Hatch process set a baseline of a tax code without any “tax expenditures” and instructed the other members of the Senate to make the case as to why the tax provisions they support should remain in a reworked code. Submissions were due on July 26, and while some Senators submitted detailed letters, the majority of Senators either submitted letters describing their general “principles” for tax reform or opted to provide no written submission at all.
Chairman Baucus has announced that he hopes to schedule a mark-up of a comprehensive tax reform bill in September, October or November. It remains to be seen how Baucus’ “Chairman’s Mark” would address the question of revenue. If the proposal does not raise significant revenue, Senate leadership maintain that it would not be allowed to come to the Senate floor for a vote. However, if it does raise significant revenue, no Republicans would be expected to support it and it would be nearly impossible to reconcile with a revenue-neutral bill that may pass out of the House.
FIRPTA Reform has the Attention of Congress, Administration
NAREIT, in concert with The Real Estate Roundtable and other organizations, continues to advocate for the reform of the Foreign Investment in Real Property Tax Act (FIRPTA), which places a special tax burden on the capital gains of non-U.S. investors who sell U.S. equity real estate, including REIT stock.
International tax regimes typically call for global investors to pay taxes on their profits from the sale of equity investments in their home countries, rather than in the countries where the investments are made. This is the case in the U.S. for all equity investments other than real estate. Removing or minimizing the FIRPTA tax burden would be an important step in allowing the U.S. commercial real estate industry to compete on a level playing field with other types of equity investments for the global capital that is critically needed to recapitalize and strengthen the real estate segment of our economy.
There continues to be significant support for FIRPTA reform within the halls of Congress. On June 18, Senators Bob Menendez (D-NJ) and Mike Enzi (R-WY) introduced S. 1181, the Real Estate Investment and Jobs Act of 2013 with bipartisan support. Their bill currently has 29 co-sponsors. On July 31, Representatives Kevin Brady (R-TX) and Joe Crowley (D-NY) introduced H.R. 2870, which is also named the Real Estate Investment and Jobs Act of 2013 and which also has bipartisan support from 14 co-sponsors. Both bills include two important provisions that would amend the “portfolio investor” exception for sales of stock and capital gains dividends of listed REITs and reverse a 2007 IRS Notice with respect to the treatment of liquidating distributions of a domestically controlled qualified real estate investment entity that had turned well-established practice on its head.
Additionally, NAREIT and its partners have been encouraged by the fact that the Obama Administration’s proposed Fiscal Year 2014 budget calls for modifying FIRPTA to allow non-U.S. pension funds that invest in U.S. real estate to receive the same tax treatment as U.S. pension funds. This is a positive development, which we believe to be the result of ongoing conversations between industry advocates, Congressional leaders and Administration officials.
Administration, House & Senate Weigh in on Housing Reform
The improving economy, the anticipated conclusion of the Federal Reserve’s QE3 bond purchases and likely interest rate rise, together with encouraging data on home purchases, has inspired a renewed Washington focus on housing finance policy and reform.
On July 24, 2013, the House Financial Services Committee approved, by a vote of 30-27, H.R. 2767, the Protecting American Taxpayers and Homeowners Act of 2013 (PATH Act), a measure introduced by Representative Scott Garrett (R-NJ) and Chairman Jeb Hensarling (R-TX) that would replace Fannie Mae and Freddie Mac with a largely privatized housing finance system, without federal backing. The bill would require Fannie and Freddie to be scaled down and liquidated over a period of five years, while creating a "National Mortgage Market Utility" which would serve as a standard-setter charged with developing best practices for private mortgage players. The utility would be banned from any direct role in the market and could not provide guarantees.
The PATH Act has no Democratic support at this time. Moreover, several important stakeholder groups, including the National Association of Realtors, the American Bankers Association, Mortgage Bankers Association and others have expressed concerns about the bill, particularly about the bill’s omission of any kind of explicit federal backstop to provide liquidity throughout economic cycles. Chairman Hensarling has stated he would like to move the bill to the House Floor after the August recess, but it is unclear whether he will have sufficient support to do so – even among his Republican colleagues.
In the Senate, Senators Bob Corker (R-TN) and Mark Warner (D-VA) are the lead co-sponsors of a bipartisan alternative approach, S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013 . Their bill, which currently has 9 co-sponsors from both parties, and has garnered supportive statements from some industry and consumer groups, including the Mortgage Bankers Association, the National Association of Realtors and the Consumer Federation of America calls for: 1) replacing Fannie and Freddie within five years with a new FDIC-like governmental entity, the Federal Mortgage Insurance Corp (FMIC), intended to support private sector securitization activities by developing standard form credit risk-sharing mechanisms, standards and products; 2) insuring the portion of covered securities for which private market participants have not taken a first loss position; 3) charging and collecting fees, including guarantee fees to be charged to private sector participants; and, 4) serving as a catastrophic reinsurer. It is expected that this proposal will be formally considered by the Senate Banking Committee after Congress returns in September.
On August 6, 2013, in a speech in Phoenix, Arizona, President Barack Obama weighed in with the Administration’s vision for the future of the U.S. housing finance. Many regard this as a watershed event, as the Administration has not previously detailed its views on how to move from the conservatorship of Fannie Mae and Freddie Mac, now in its fifth year. In 2011, the Administration outlined three broad policy options addressing these Government Sponsored Enterprises (GSEs) but did not provide specifics or a preferred approach. The President’s speech was accompanied by a 12 page White House fact sheet, A Better Bargain for the Middle Class: Housing.
CIAT Continues to Lay Groundwork for TRIA Extension
As a founding member of the Coalition to Insure Against Terrorism (CIAT), a formal coalition of the policyholder community that depends on ready access to affordable terrorism insurance to conduct business, NAREIT is a leader in the effort to extend the Terrorism Risk Insurance Act (TRIA) beyond its scheduled expiration at the end of 2014. TRIA is a public-private risk-sharing mechanism through which the government enables the private sector to insure against terrorism risk. Under current law, the government would step in to absorb some losses in the most extreme events – as it certainly would absent TRIA. However, the law ensures that policyholders and insurers remain in the first-loss position, and that any government outlay resulting from terrorism event is recouped through assessments on policyholders.
In the 113th Congress, three legislative proposals have been introduced in the House of Representatives to extend TRIA. Representative Michael Grimm (R-NY), a member of the House Financial Services Committee, introduced H.R. 508, the “TRIA Reauthorization Act of 2013.” This bill to extend TRIA for five years currently has 73 co-sponsors . Representatives Michael Capuano (D-MA) and Peter King (R-NY), both members of the House Financial Services Committee, introduced H.R. 2146, the “Terrorism Risk Insurance Program Act of 2013.” This bill to extend TRIA for ten years currently has 30 co-sponsors. In addition, Representative Bennie Thompson (D-MS), the Ranking Member on the House Homeland Security Committee, introduced H.R. 1945, the “Fostering Resilience to Terrorism Act of 2013.” This bill, which has 5 co-sponsors would also extend TRIA for ten years, and includes provisions to provide the Homeland Security Committee a portion of jurisdiction – and the potential to conduct hearings on this issue.
Despite this apparent momentum behind an extension of TRIA, several conservative members of Congress, including Financial Services Committee Chairman Jeb Hensarling (R-TX), are actively questioning whether the time has come for TRIA to expire, thereby fully relying on the private market to insure against any future terrorist incidents. More education will be required to remind these lawmakers that the private sector simply does not currently have the capacity to underwrite against a threat for which limited information is available and modeling is virtually impossible.
NAREIT and CIAT are actively engaged on Capitol Hill in an effort to provide this education to all Members of Congress and their staff – the majority of whom were not in office when TRIA was last extended in 2007 – about the need for TRIA, and the negative economic impact that will be felt if terrorism insurance ceases to be affordably available. CIAT has participated in briefings for congressional staff, including one that highlighted a report released by commercial insurance brokerage firm Marsh & McLennan Companies concluding that TRIA is necessary for the terrorism risk insurance market to function and for financing to continue to flow to commercial real estate. Similarly, a report by Fitch Ratings paints a dire picture if Congress fails to renew the Terrorism Risk Insurance Act.
Additionally, CIAT is aware that both the House Financial Services Committee and the Senate Banking Committee may be planning hearings on TRIA during the fall session, possibly in September. While no companion bill has yet been introduced in the Senate, and none is expected in the near future, Banking Committee Chairman Tim Johnson (D-SD) has included the re-authorization of TRIA in his agenda for the 113th Congress. NAREIT and CIAT also remain in regular contact with members of the Banking Committee who share our view that TRIA must be extended.
Coalition Seeks to Build Momentum Behind Sales Tax Fairness Measure
NAREIT continues to work with its allies in advocating for the passage of the Marketplace Fairness Act (MFA), legislation that would allow states that meet certain minimum simplification standards to impose sales and use tax collection responsibility equally on retail sales regardless of whether they occur in stores or online. NAREIT is a member of the Marketplace Fairness Coalition, a broad group of businesses and trade associations, including the American Booksellers Association, the International Council of Shopping Centers, the National Association of College Stores, the National Retail Federation, and the Retail Industry Leaders Association, which supports the Marketplace Fairness Act. Notably, online retailer Amazon.com is a member of the Coalition.
As previously reported, the Senate passed S. 743, the Marketplace Fairness Act of 2013, on May 6, 2013, by a bipartisan vote of 69-27. This legislation was introduced, and expertly managed, by Senators Mike Enzi (R-WY), Dick Durbin (D-IL), Lamar Alexander (R-TN) and Heidi Heitkamp (D-SD). While hopes were high that this strong showing in the Senate would allow similar action in the House on H.R. 684, little has occurred in that chamber on this issue. However, the Marketplace Fairness Coalition continues to be active in requesting hearings and floor action for the bill, while also aggressively responding to misleading statements from groups that oppose sales tax fairness.
Given that a significant portion of the opposition to the MFA comes from conservative lawmakers, the Coalition is pleased to be able to point these lawmakers to a study by noted conservative economist and former economic adviser to President Reagan, Arthur Laffer. Laffer’s study projects that enabling the collection of sales tax on remote sales by states would allow for the reduction of other state-level taxes and result in increases in gross state product and state employment.
Derivatives End-User Bill Passes House, Introduced in Senate
The House of Representatives passed a bill to amend the derivatives reform provisions of the Dodd-Frank Act to ensure that the statute is consistent with the original Congressional intent that commercial end-users should not be subjected to margin requirements on the non-cleared swaps they use to manage business risk. The bill, H.R. 634, the Business Risk Mitigation and Stabilization Act, passed by an overwhelming vote of 412-11 on June 12.
This effort has long been a priority of the Coalition for Derivatives End-Users and could address a concern of real estate property companies that use derivatives to manage business risk. Companion legislation, S. 888, has been introduced in the Senate by Sen. Johanns (R-NE) and has 16 bipartisan cosponsors . It remains to be seen if Senate leadership will allow this bill to come to the floor for a vote.