Apartment Industry Colleagues,
March was a big month for two of the top federal legislative issues that could impact the apartment industry’s future – housing finance reform and tax reform. In each case, a long-anticipated legislative proposal was released by a committee chairman. Neither one has universal support at the moment and both have their critics. The outlook for one is much, much brighter than the other but still faces significant hurdles. Regardless of the ultimate outcome for either one, they will both shape certain parts of the debate going forward this Congress or even into the next.
The Senate Shows Its Cards on Housing Finance Reform
At long last, Senate Banking Committee Chairman Tim Johnson (D-S.D.) in concert with the Committee’s Ranking Member Mike Crapo (R-Idaho) (pronounced “cray-poe) introduced their version of housing finance reform legislation. Drawing heavily from advanced spadework by Sens. Mark Warner (D-Va.) and Bob Corker (R-Tenn.), this bipartisan legislation balances the universally held goal of ending Fannie Mae and Freddie Mac as we know them with maintaining the federal government’s appropriate role to ensure sufficient capital exists to finance multifamily (and single-family) housing. While there are still details to be worked out, we like the bill. It explicitly acknowledges the importance of a separate solution for multifamily versus single family and lays out a plan accordingly.
There are challenges ahead for this bill. First, it has drawn the ire of civil rights groups like the National Council of La Raza, the National Fair Housing Alliance and the National Urban League for not providing enough access to credit for people of color and families with moderate to low incomes. Second, to have any chance of passing on the Senate floor, the bill needs a strong vote out of the Banking Committee – not an easy lift when both progressives and conservatives on the committee have concerns with the bill. Finally, many of the conceptual underpinnings of the Johnson-Crapo legislation – eliminate Fannie and Freddie but maintain a federal backstop, implement a separate multifamily solution – are completely opposite from the approach that House Financial Services Committee Chairman Jeb Hensarling (R-Texas) took in his bill, the Protecting America’s Taxpayers and Homeowners (PATH) Act. That could complicate House-Senate negotiations significantly.
Aside from the policy hurdles above, there are political speed bumps as well. With the GOP very close to taking control of the Senate, the incentives to try and pass the bill this year are weak when they could get a bill more to their liking with one of their own at the helm of the Banking Committee. By the same token, wouldn’t the House GOP prefer to negotiate with a Senate also controlled by Republicans? And, finally, while the housing market recovers, Fannie and Freddie continue to write billions in checks back to the taxpayer, paying off what they borrowed beginning in 2008. A steady stream of cash could weaken the resolve to do-away with these entities any time soon. Watch the tenor and pace of the debate in the coming months for signs that political winds are slowing down the process of reform.
Profiles in Tax Reform Courage
Last month House Ways and Means Chairman Dave Camp (R-Mich.) released his long-awaited proposal on comprehensive tax reform. As you know, Camp worked for the past two years on a bicameral and bipartisan basis with Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, to come up with a proposal. Unfortunately, Baucus resigned just a few months ago to become the next U.S. Ambassador to China, so Camp lost his Democratic partner in the Senate. Undeterred, he moved forward anyway and introduced his bill.
House GOP leadership and many members of the Republican caucus were not excited about Camp putting out his bill. Depending on its content, it could (a) expose Republicans to negative press and (b) take voters’ focus away from the many problems with the implementation of the Affordable Care Act, a topic that was doing wonders for GOP campaigning. In short, most everyone wanted politics to trump policy. Again, showing a lot of courage, Camp released his “discussion draft” and while it may not have had the impact on the voters that worried Republicans, it definitely got the attention of the business community.
Oil and gas interests, manufacturers and business overall thanked the chairman for starting the discussion while expressing great concerns with the approach in the bill – not surprisingly with specific aspects that negatively impact their industries. Single-family housing groups had strong reactions to proposals that simplify the tax code, but in their view dramatically undermine the utility of the mortgage interest deduction. Perhaps the strongest reaction came from the financial services sector who weren’t pleased with the inclusion in the discussion draft of a small tax on big lending institutions. In fact, they were so unhappy that they reportedly threatened to cancel GOP fundraisers.
For multifamily, the legislation is a mixed bag. On the plus side the taxation of a carried interest is resolved to our favor with only non-real estate transactions subject to ordinary income as opposed to capital gains tax rates. Further, the Low Income Housing Tax Credit survives albeit with some haircuts. This is despite having been reportedly eliminated in previous versions of the bill. On the negative side, future depreciation recapture is taxed at ordinary income rates, depreciation schedules are extended for multifamily and 1031 exchanges are eliminated on a prospective basis, respectively.
It is generally conceded the Camp discussion draft will not see any vote on the floor of the House this year. Further, the new Senate Finance Committee Chairman, Ron Wyden (D-Ore.), is less interested in starting with a comprehensive reform bill and more focused on dealing with tax “extenders,” the annually expiring tax provisions in the code. Reform writ large is off the table for this year. Setting aside the apartment industry’s concerns with this legislation, Camp gets a lot of credit for spending literally years taking input, talking with the other side of the aisle and putting together an honest proposal to reduce the corporate tax rate (one of his chief objectives) and simplify the tax code, regardless of the reaction from the taxed.
Compared side-by-side, I give housing finance reform a better chance by far than tax reform of seeing the President’s desk this year. That advantage is more about the low odds for tax reform than high odds for housing finance reform. Even if neither legislative proposal sees the finish line, they have made their marks on the debate, for good or bad, and the apartment industry will have to consider them if and when the debate resumes on these issues.
Don’t forget to email me and tell me what you think of this column.
Thanks for reading and talk with you next month.
Greg Brown is NAA’s Senior Vice President of Government Affairs. He joined NAA in the spring of 2010 to lead the expansion of the Government Affairs Department. Greg has been a housing advocate for 15 years, with a strong emphasis in multifamily issues. Tell him what you think about his musings by emailing him.