Over the past four years, both of Congress’s tax-writing committees (House Ways and Means Committee and Senate Finance Committee) were active in holding hearings and developing draft tax reform plans. However, these draft plans did not move beyond the discussion draft stage.
Until late 2013, most of the tax reform discussion was focused on rate reduction, but no details were provided that would suggest which deductions and tax credits would be reduced or eliminated in order to "pay for" deep rate cuts. NAR has been particularly concerned about the mortgage interest deduction (MID) and the property tax deduction.
In late 2013, Former Senate Finance Committee Chairman Max Baucus (D-MT) released a series of staff discussion drafts on tax reform. Each draft covered a different topic of tax reform, and included some specific proposals to repeal certain tax benefits now available under the current tax code. Important to commercial and rental real estate were proposals to increase the depreciable lives of real property used in business or held for investment to 43 years (from the current periods of 39, 27.5, and 15 years), to raise the tax rate on gain from depreciation recapture from the current 25% to the ordinary income tax rate (now as high as 39.6%), and to repeal the tax rules that allow taxpayers to exchange like-kind real estate on a tax-deferred basis. In February 2014, Former House Ways and Means Chairman Dave Camp (R-MI) released a comprehensive draft tax reform plan that included many of the same provisions as the Baucus plan that would be negative to commercial and investment real estate, as well as some different ones that would be devastating to residential real estate.
Many stakeholders in the real estate community, including NAR, viewed these proposals as a significant threat, even though there was little chance of the bills advancing in the near-term. NAR, together with many other groups, sent a detailed letter to the Finance Committee in January 2014, which outlined the many reasons why adoption of the Baucus proposals would be a major step in the wrong direction for the nation’s economy, for job growth, and for tax reform. NAR has also expressed grave concern with the Camp plan.
Both Senator Baucus and Representative Camp have now retired, but their tax reform ideas are still considered by many current policymakers to be viable ideas from which to draw for future tax reform plans. This is especially true when tax reform is considered in a revenue-neutral environment, such as still the case now. This means that tax rate reduction would have to be offset by the removal or dilution of tax benefit provisions in the tax code.
The new leaders of the tax-writing committees, Ways and Means Chairman Paul Ryan (R-WI) and Finance Chairman Senator Orrin Hatch (R-UT), have each expressed a strong desire to accomplish tax reform, if possible, before the political realities of the 2016 presidential election make such a legislative feat next to impossible.
With Republicans now in control of both Houses of Congress, some observers believe tax reform is more probable than it has been. However, the lack of at least 60 votes in the Senate by the Republicans means that Democrats will still have a major role in determining the shape of any successful tax reform plan. Moreover, President Obama's veto power virtually guarantees that any tax reform plan that is ultimately enacted would have to move a long way toward his vision of what reform should accomplish.
At this early stage, all sides seem willing to at least discuss tax reform for the business side, if not for individuals, but whether a workable compromise can be forged remains an open question. However, with policymakers expressing a willingness to simplify the tax law and to broaden the base and lower the tax rate, the possibility exists that common ground on tax reform can be found. Along with this possibility is the danger that vital tax benefit provisions for commercial and investment real estate could be repealed or limited in order to “pay for” lowering the tax rates.